We analyze the use of alternative trading systems in a large sample of institutional orders and the trades that constitute these orders. Proprietary data allow us to distinguish between orders and trades filled by day and after-hours crossing systems, electronic communication networks (ECNs), and traditional brokers. Controlling for variation in order and security characteristics, as well as endogeneity in the choice of trading venue, we find that realized execution costs are generally lower on alternative trading systems. Order handling rules and tick size changes implemented in 1997 appear to have reduced the cost advantage of trading on ECNs.

Proprietary data allow us to distinguish between institutional investors' orders directed to soft‐dollar brokers and those directed to other types of brokers. We find that soft‐dollar brokers execute smaller orders in larger market value stocks. Allowing for differences in order characteristics, we estimate the incremental implicit cost of soft‐dollar execution at 29 (24) basis points for buyer‐ (seller‐) initiated orders. For large orders, incremental implicit costs are 41 (30) basis points for buys (sells). However, we document substantial variability in these estimates, and research services provided by soft‐dollar brokers may at least partially offset these costs.