Using audit-trail data from the Toronto Stock Exchange, we find that market makers scale back in unison when market conditions are unfavorable, which contributes to covariation in liquidity supply, both within and across stocks. Market conditions lower aggregate participation via their impact on trading profits and risk. Contrary to regulatory view, higher stock volatility is associated with more participation and higher profits, even after controlling for other market conditions, including stock volume. Fragility concerns extend to larger stocks and to active participants. The designated market maker mitigates periodic illiquidity created by synchronous withdrawal of market makers in large and small stocks.

A significant but unresolved question in the current debate about the role of intermediaries in financial markets is whether intermediaries behave as passive traders or whether they actively seek and trade on information. We address this issue by explicitly comparing the informational advantages of intermediaries with those of other investors in the market. We find that intermediaries account for greater price discovery than other institutional and individual investors in spite of initiating fewer trades and volume. Furthermore, intermediary information does not arise from inappropriate handling of customer orders by intermediaries. We propose that our findings are consistent with noisy rational expectations models, where agents extract valuable information from past prices. Intermediaries bear little or no opportunity cost of monitoring market conditions, which gives them an advantage in making profitable price-contingent trades. Lower trading costs may also enable intermediaries to trade more effectively and frequently on their information.

Many financial markets, including electronic limit order markets, assign designated liquidity providers (LPs). We study the experience of the Stockholm Stock Exchange, where listed firms contract directly with LPs. Our analysis offers insights regarding situations where designated liquidity provision may be beneficial. In addition, we consider the form of liquidity provision contracts, including affirmative obligations required of the LP and compensation for LP services. We find that low current trading activity, wide spreads, and higher information asymmetry increase the attractiveness of contracted liquidity provision. The evidence indicates that LPs trade against market movements and in times of wide spreads. On balance, firms contracting with LPs experience a decreased cost of capital and significant improvements in market quality and price discovery.

Using detailed order handling data, we find that institutional brokers who route more orders to affiliated alternative trading systems (ATSs) are associated with lower execution quality (i.e., lower fill rates and higher implementation shortfall costs). To separate clients’ preference for ATSs from brokers’ routing decisions, we confirm these results for orders where brokers have more order handling discretion, matched broker analysis that accounts for ATS usage, matched child orders that account for client intent, and based on an exogenous constraint on ATS venue choice. Our results suggest that increased transparency of order routing practices will improve execution quality.

This paper investigates the impact of institutional trading on SEO lead underwriter choice. We measure the trading intensity of the lead investment bank in several different ways and find that bank trading has a significant effect on underwriter choice. A bank that concentrates its trading in particular stocks has an improved probability of earning the underwriting mandate in those stocks. We also find that the trading intensity of the lead bank has a significant effect on SEO underpricing and the composition of the underwriting syndicate. We attribute these results to the fact that banks that are large and active traders in an issuer's stock have a competitive advantage in marketing to the current shareholder base. For smaller banks, we show that concentrating the bank's own trading in the issuer's stock produces similar effects.

We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007–2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity suppliers withdraw from risky securities during the crisis and their participation does not recover for an extended period of time. The illiquidity of specific stocks is significantly affected by institutional trading patterns; participation by liquidity supplying institutions can ameliorate illiquidity, while participation by liquidity demanding institutions can exacerbate illiquidity. Our results provide guidance on why some stocks take longer to recover in a crisis.

Using a proprietary dataset of institutional investors' equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading-desk skill is positively correlated with the performance of the institution's traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading-desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance.