How has the Relevance of Institutional Brokerage Changed

Institutional brokerage rates have been in decline. We investigate whether this reduction has coincided with a fall in benefits provided by brokers to institutional asset managers. We use trade packages from both active and passive equity funds from 1995 to 2001 and active equity funds from 2002 to 2010. We find that later period active funds recoup a combined 1.75 basis point benefit (from price impact cost recovery and short-term alpha) per basis point of brokerage cost. Later period active investors saw improved trade price impact and shorter-term alpha net benefits, relative to earlier period active investors. These results are robust after controlling for trade characteristics and cross-sectional variation over time. Our findings suggest that brokers innovate to provide valuable services in the subsequent, lower brokerage environment.