Agency Costs of Institutional Trading
from Quantitative Work Alliance for Applied Finance, Education & Wisdom (QWAFAFEW) - Boston
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Tuesday, March 11, 2008, 6:15pm - 8:15pm
Under the typical institutional trading arrangement a portfolio manager makes the trade decision and a trading desk executes the trade, with execution performance evaluated against a benchmark such as the volume weighted average price (VWAP). We develop a model which shows that this arrangement gives the trader an incentive to maintain a relatively low ask quote when valuations rise to expedite sell trades and a relatively high bid quote when valuations fall to expedite buy trades. This process inhibits information assimilation giving rise to price-adjustment delays. We provide empirical support for this argument with several previously undocumented cross sectional and time series facts about price-adjustment delays.
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