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This paper develops a measure of execution costs (market impact) of transactions on the NYSE. The measure is the volume-weighted average price over the trading day. It yields results that are less biased than measures that use single prices, such as closes. The paper then applies this measure to a data set containing more than 14,000 actual trades. We show that total transaction costs, commission plus market impact costs, average twenty-three basis points of principal value for our sample. Commission costs, averaging eighteen basis points, are considerably higher than execution costs, which average five basis points. They vary slightly across brokers and significantly across money managers. Though brokers do not incur consistently high or low transaction costs, money managers experience persistently high or lost costs. Finally, the paper explores the possible tradeoff between commission expenditures and market impact costs. Paying higher commissions does not yield commensurately lower execution costs, even after adjusting for trade difficulty. We cannot determine whether other valuable brokerage services are being purchased with higher commission payments or whether some money managers really are inefficient consumers of brokerage trading services.RECENT YEARS HAVE WITNESSED an explosion of institutional trading on the nation's stock exchanges. In 1970, only 17,000 trades of blocks of 10,000 or more shares were done on the New York Stock Exchange; these accounted for merely fifteen percent of total volume. In 1984, there were 433,000 such block trades, accounting for fifty percent of volume. These trades are costly and, in an informationally efficient stock market, cannot help but have a deleterious effect on the investment performance of institutional investors.The cost of a trade has at least two components. The first is the commission cost. These have declined precipitously since "May Day" (May 1, 1975), when the New York Stock Exchange abandoned fixed minimum commissions.1 The second component of transaction costs is the market impact cost of executing a trade. The price of a transaction may reflect both the true equilibrium price plus (for buys) or minus (for sells) a price concession necessary to get the trade done promptly. The deviation from the "equilibrium" price is the market impact cost.

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