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Brokerage Commissions and Institutional Trading Patterns

Michael Goldstein (), Paul Irvine (), Eugene Kandel () and Zvi Wiener ()

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: Why do brokers charge per-share commissions to institutional traders? What determines the commission charge? We examine commissions and order flow for a sample of institutional orders and find that most per-share commissions are concentrated at only a few price points, primarily 5 and 6 cents per share. Further, we find that the prior-period commission, rather than execution costs, is the strongest determinant of next period's commission. These results are inconsistent with negotiation of commissions on an order-by-order basis or with the impression of a continuous transaction cost that is deduced from the distribution of percentage commissions, suggesting that commissions are not a marginal cost of execution. We also find that institutional clients concentrate their order flow with a small set of brokers, and that small institutions concentrate more than large institutions. Collectively, our results suggest that brokers and their institutional clients enter into long-term agreements where the per-share commission is constant, and the order flow routed to a particular broker is used to maintain the required payment for an institution's desired level of service. Commissions, therefore, constitute a convenient way of charging a predetermined fixed fee for broker services.

JEL-codes: G23 G24 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2004-04
New Economics Papers: this item is included in nep-acc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

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Journal Article: Brokerage Commissions and Institutional Trading Patterns (2009) Downloads
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