Execution Costs and Investment Performance: An Empirical Analysis of Institutional Equity Trades (Revision of 26-94)

This paper examines the execution costs and investment performance of $83 billion of recent equity transactions by 21 institutional traders. These traders are of particular interest because we have detailed information on the order submission strategy adopted by traders with different investment styles. We analyze the major components of execution costs, including explicit and implicit costs. Execution costs are substantial relative to investment performance and are positively related to measures of trade difficulty. Trading systems differ in their ability to accommodate large trades; orders in exchange-listed stocks generally have a lower price impact than in comparable NASDAQ stocks. There is substantial variation in trading costs and performance across institutions, reflecting differences in trading ability and style. The results provide a way to assess various trading strategies and to form benchmarks to evaluate portfolio managers.