Measuring institutional trading costs and the implications for finance research: The case of tick size reductions |
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| Authors: | Gregory W Eaton Paul J Irvine Tingting Liu |
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| Institution: | 1. Spears School of Business, Oklahoma State University, 461 Business Building, Stillwater, OK 74078, United States;2. Neeley School of Business, Texas Christian University, Tandy Hall, Fort Worth, TX 76109, United States;3. Ivy College of Business, Iowa State University, 3115 Gerdin Business Building, Ames, IA 50011, United States;1. Harvard Business School, United States;2. Princeton University, United States;1. Erasmus Scchool of Economics - Burgemeester Oudlaan 50, Erasmus University Rotterdam, Rotterdam PA 3062, the Netherlands;2. Tilburg University - Warandelaan 2, Tilburg AB 5037, the Netherlands;1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia |
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| Abstract: | Using proprietary institutional trade data, we construct a price impact measure that represents the costs faced by institutional investors. We show that many widely used liquidity measures do not adequately capture institutional trading costs. We then find that institutional trading costs are not dramatically impacted by decimalization, casting doubt on the widely used identification strategy that employs decimalization as an exogenous shock to liquidity, particularly institutional liquidity. Indeed, we find that conclusions from prior research are significantly altered when we measure liquidity using institutional trading data. |
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