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

Using a unique dataset of institutional investors’ equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. The best institutional desks exhibit a persistent pattern of negative trading cost, suggesting that skilled traders have the ability to create positive (investment) alpha through their trading strategies. We investigate several possible explanations for the institutional trading cost persistence including broker selection, trading style and commissions. We identify a set of trading decisions that are associated with performance. Our study contributes to the relatively unstudied literature on the performance of institutional trading desks. Our findings suggest that trading cost is a source of mutual fund performance persistence and that broker selection based on past performance is an important dimension of the money manager’s Best Execution obligation. *We thank Hank Bessembinder, Jeffrey Busse, Paul Goldman, Jeff Harris, Swami Kalpathy, Qin Lei, Eli Levine, Stewart Mayhew, Tim McCormick, Rex Thompson, Ram Venkataraman, Andres Vinelli, Kelsey Wei and seminar participants at the Commodity Futures Trading Commission (CFTC), Financial Industry Regulatory Authority (FINRA), Indian School of Business, Nanyang Technological University, National University of Singapore, Securities and Exchange Commission (SEC), the 3 Annual IIROC conference, Singapore Management University and Southern Methodist University for comments. We are grateful to ANcerno Ltd. (formerly the Abel/Noser Corporation) and Judy Maiorca for providing the institutional trading data. Venkataraman thanks the Marilyn and Leo Corrigan Endowment at Southern Methodist University for research support. Anand gratefully acknowledges a summer research grant from the office of the VP of Research at Syracuse University. Corresponding author: Kumar Venkataraman, [email protected]. Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Cost