How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets

Michael Aitken, Gerald T Garvey and Peter Swan

The Journal of Business, 1995, vol. 68, issue 1, 1-33

Abstract: In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients. Copyright 1995 by University of Chicago Press.

Date: 1995
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