Measuring institutional trading costs and the implications for finance research: The case of tick size reductions

Gregory W. Eaton, Paul J. Irvine and Tingting Liu

Journal of Financial Economics, 2021, vol. 139, issue 3, 832-851

Abstract: Using proprietary institutional trade data, we construct a price impact measure that represents the costs faced by institutional investors. We show that many widely used liquidity measures do not adequately capture institutional trading costs. We then find that institutional trading costs are not dramatically impacted by decimalization, casting doubt on the widely used identification strategy that employs decimalization as an exogenous shock to liquidity, particularly institutional liquidity. Indeed, we find that conclusions from prior research are significantly altered when we measure liquidity using institutional trading data.

Keywords: Decimalization; Institutional trading costs; Market microstructure; Stock liquidity; Tick size reductions (search for similar items in EconPapers)
JEL-codes: G10 G20 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:139:y:2021:i:3:p:832-851

DOI: 10.1016/j.jfineco.2020.09.003

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