Are Market Center Trading Cost Measures Reliable?

The cost of trading in securities markets is often estimated on the basis of: 1. the number of shares executed rather than the number of shares in the original order; and 2. the quote midpoint at the time of trade execution rather than at the time of order submission. In our paper, we obtain data from a U.S. brokerage firm to examine the severity of these two problems. We find that the quote midpoint and order size at submission differ from that at execution approximately 40% of the time. These differences are economically important and are more likely to occur when the market is less liquid. Our results highlight the need for caution when inferring trading costs from market center data sources.