Market impact costs of institutional equity trades

Abstract

This article analyzes market impact costs of equity trading by one of the world's largest pension funds. We find that, on average, these costs are small in terms of market disruption, but substantial in terms of costs for the pension fund. Average market impact costs equal 20 basis points for buys and 30 basis points for sells. Furthermore, we show that momentum and volatility have considerable influence on market impact costs. Other important determinants of these costs are trade type (agency, single, or principal), trade size, trading strategy, trading venue, and industry sector. Additionally, we find that the timing of trades plays a substantial role in explaining trading costs. Moreover, we also establish a cost–risk trade-off: the longer it takes to execute a trade, the lower the expected market impact costs but the higher the volatility of these costs.