Institutional Brokerage Networks: Facilitating Liquidity Provision

Munhee Han, Sanghyun (Hugh) Kim and Vikram K Nanda

The Review of Financial Studies, 2024, vol. 37, issue 9, 2903-2935

Abstract: We argue that institutional brokerage networks facilitate liquidity provision and mitigate the price impact of large non-information-motivated trades. Using commissions, we map trading networks of mutual funds (institutions) and their brokers. Central funds (institutions) tend to outperform their peripheral counterparts in terms of return gap (execution shortfall). This outperformance is more pronounced when funds experience large outflows and for large trades in less liquid stocks. Central brokers can deliver superior trade execution compared to peripheral brokers, but mainly for central institutions. We use the collapse of Lehman Brothers as a quasi-natural experiment to establish the likely causality of our findings.

Keywords: G14; G23; G24 (search for similar items in EconPapers)
Date: 2024
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