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The Determinants of Execution Costs in Short-Term Money Markets


  • This research was funded by the Sydney Futures Exchange under Corporations Regulation 7.5.88(2). The authors wish to thank Austraclear for providing the data for this study. This paper was improved by the comments of Tom McInish, Maurice Farhart, Matthew Johnson, George Li, Brad Wong, and Jin Young Yang, participants of the Australian Securities Exchange Seminar Series and participants of the 2008 AFAANZ conference, and an anonymous referee.

Finance Discipline, Faculty of Economics and Business, University of Sydney, NSW 2006, Australia; Phone +61 2 9227 0895; Fax: +61 2 9351 6461; E-mail:


Prior research attributes the observed negative relation between execution costs and trade size in opaque markets to two factors—information asymmetry and broker-client relationships. We provide evidence that a trader's ex ante transaction price information and the relationship traders have with their brokers are both significant determinants of a trader's execution costs in an opaque market; however, traders who establish strong relationships with their brokers will achieve a greater reduction in execution costs than traders with ex ante transaction price information. We also find evidence that trade size has little explanatory power after controlling for a trader's ex ante transaction price information and broker-client relationships.