Institutional Trading and Soft Dollars

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Abstract
This paper examines the release of trades to the brokerage industry; proprietary data on the trades of 33 institutions totaling $124 billion allow us to distinguish between trades directed to soft dollar brokers and those directed to brokers for pure execution purposes. We find that institutions' choice of brokers depends largely on trade difficulty and on the investment style of the institution. We estimate a shadow price for soft dollar rebates by examining the execution cost of trades executed by soft dollar brokers to comparable trades executed by other brokers. Our estimates put the incremental cost of soft dollar execution at 23 basis points per trade, representing approximately one-third of the total costs of the average trade. If, in addition to controlling for trade characteristics, we also control for institution-specific differences in execution costs, we find that soft dollar trades cost approximately 11 basis points (or about 17%) more than non-soft-dollar trades.