Institutional Trading Costs and Alternative Trading Systems

Using proprietary data, we examine institutional orders and trades filled by alternative electronic trading systems. Our data consist of almost 800,000 orders (corresponding to 2.15 million trades) worth approximately $1.6 trillion, between the first quarter of 1996 and the first quarter of 1998. These data allow us to distinguish between orders filled by day and after-hours crossing systems, electronic communication networks (ECNs) and traditional brokers. We find that crossing systems are used largely to execute orders in listed stocks, while ECNs concentrate in Nasdaq stocks. On average, broker-filled orders are larger, have longer duration, and higher fill rates than orders executed by alternative trading systems. Controlling for variation in order characteristics, difficulty, and endogeneity in the choice of trading venue, we find that realized execution costs are generally lower on crossing systems and ECNs. Order handling rules and tick size changes implemented in 1997 appear to reduce the cost advantage of trading on ECNs. Our results shed light on the emergence of alternative electronic trading systems that provide significant competition for order flow, for both exchanges and dealer markets