Measuring Institutional Trading Costs and the Implications for Finance Research: The Case of Tick Size Reductions

63 Pages Posted: 17 Oct 2018 Last revised: 22 Apr 2021

See all articles by Gregory W. Eaton

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance

Paul J. Irvine

Neeley School of Business

Tingting Liu

Iowa State University

Date Written: October 11, 2019

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.

Suggested Citation

Eaton, Gregory W. and Irvine, Paul J. and Liu, Tingting, Measuring Institutional Trading Costs and the Implications for Finance Research: The Case of Tick Size Reductions (October 11, 2019). Journal of Financial Economics (JFE), Vol. 139, 2021, pp. 832-851, Available at SSRN: https://ssrn.com/abstract=3255735 or http://dx.doi.org/10.2139/ssrn.3255735

Gregory W. Eaton (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

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