Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs

Abstract

We contribute to the literature on the performance of financial intermediaries. Using a unique dataset of institutional investors" equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We investigate several possible explanations for trading cost persistence including broker selection, investment style, and commissions, and identify a set of trading decisions that are associated with performance. Our findings support the presence of skilled traders who can create positive (investment) alpha through their trading strategies. The substantial and persistent differences in institutional trading costs are large enough to significantly contribute to mutual fund performance persistence. We find that past broker performance can reliably predict future performance suggesting that broker selection based on past performance is an important dimension of money manager"s fiduciary obligation. AbstractWe contribute to the literature on the performance of financial intermediaries. Using a unique dataset of institutional investors" equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We investigate several possible explanations for trading cost persistence including broker selection, investment style, and commissions, and identify a set of trading decisions that are associated with performance. Our findings support the presence of skilled traders who can create positive (investment) alpha through their trading strategies. The substantial and persistent differences in institutional trading costs are large enough to significantly contribute to mutual fund performance persistence. We find that past broker performance can reliably predict future performance suggesting that broker selection based on past performance is an important dimension of money manager"s fiduciary obligation.

A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors

“…However, one factor may be missing in the analysis of the data at the stock-day level, which is the difference in the trading skills of institutional investors. As pointed out by Anand et al (2012), some institutions consistently execute trades with lower execution shortfalls than the others. If trades are executed by different institutions at different days on different stocks, the heterogeneity of institutional trading skills likely influences the aggregated measure of trading costs at stock-day level.…”

“…For each execution, the database reports identity codes for the institution, the CUSIP and ticker for the stock, the stock price at placement time, date of execution, execution price, number of shares executed, whether the execution is a buy or sell, and the commissions paid. See Anand et al (2012) for additional details on this dataset.…”

“…Following Anand et al (2012), the cost of each trade (referred to as "ticket" in the Ancerno data) is defined in terms of execution shortfall:…”

“…I also find that the impact of HFT on institutional trading costs is stronger for both small-cap and large-cap stocks, relative to mid-cap stocks. 5 5 The main measure of trading cost in this study is execution shortfall, which captures the bid-ask spread as well as the price impact (e.g., Anand et al (2012)). I have also examined the timing delay component of trading cost to test a hypothesis that HFT reduces delays in trade execution.…”

Quintet Volume Projection

“…The price impact varies depending on order characteristics and firm-specific factors. The very recent study by Anand, Irvine, Puckett, and Venkataraman (2012) scrutinizes propriety dataset of institutional investors' equity transactions. An empirical analysis allows authors to conclude that trade implementation process contributes to relative portfolio performance.…”