Journal of Financial and Quantitative Analysis Vol. 60 No. 8 2025

Institutional Liquidity Costs, Internalized Retail Trade Imbalances, and the Cross Section of Stock Returns

Yashar H. Barardehi¹; Dan Bernhardt^2,3; Zhi Da⁴; Mitch Warachka¹

¹ Chapman University Argyros College of Business & Economics · ² University of Illinois Department of Economics · ³ University of Warwick, Department of Economics · ⁴ University of Notre Dame Mendoza College of Business

Abstract

Order flow segmentation prevents direct interactions between U.S. retail and institutional investors. Using the imbalance in observable internalized retail trades, we show wholesalers use retail flow to provide liquidity to institutional investors, especially when liquidity is scarce. Our institutional liquidity cost ( $ ILC $ ) measures average absolute retail trade imbalances, positing that institutions holding stocks with greater such averages more often resort to the expensive wholesaler-provided liquidity. $ ILC $ is correlated with expected institutional price impacts. Unlike existing illiquidity measures, $ ILC $ has economically meaningful relations with institutional holding horizons and yields annualized liquidity premia of 2.7%–3.2% post-2010, even after excluding microcap stocks.

DOI

10.1017/s0022109025000043

Volume

60

Issue

8

Pages

3826-3865

Language

en

Sources

openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓