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Individual Investors and Broker Types

Article  in  Journal of Financial and Quantitative Analysis · October 2012

DOI: 10.2139/ssrn.1572146

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 Brokerage Service and Individual Investor Trade Performance

Kingsley Y. L. Fong*,a,, David R. Gallagher*b,c, Adrian D. Lee,b

a
School of Banking and Finance, Australian School of Business, The University of New South Wales,
Sydney NSW 2052 AUSTRALIA
b
School of Finance and Economics, The University of Technology Sydney, Sydney NSW 2007,
AUSTRALIA
c
Capital Markets CRC Limited, Sydney NSW 2001, AUSTRALIA

Latest Draft: 7th April 2010

Abstract
The discount stock broker has become an important channel of trade for individual investors. We
investigate whether the lack of value in traditional full service brokers has driven the popularity in
discount broking. We find that, conditional on the holding period, discount broker trades significantly
underperform full service brokers by an amount that is comparable or exceeding the difference between
typical brokerage rates. The poor performance of discount broker trades is largely due to the lack of
private information content in their market order trades, and their limit order trades being ‘picked off’
by full service and institutional brokers. Conversely, full service broker limit order trades earn short
term gains while their market order trades generate gains over a one year horizon, which is consistent
with the usage of information and execution services respectively. We conclude that full service
brokers provide significant value to individual investors, in contrast to recent evidence that all
individual investors trade poorly. Our findings are also in contrast to recent evidence concerning the
value of broker channels in the mutual fund industry.
___________________________________________________________________________________

JEL classification: G14

Keywords: Individual investors, individual investor trade performance, market efficiency


Corresponding author. Tel: +61 2 9385 4932; fax: +61 2 9385 6347; email: k.fong@unsw.edu.au.

Fong, k.fong@unsw.edu.au, Gallagher, dgallagher@cmcrc.com, and Lee, adrian.lee@uts.edu.au.
This research was funded through an ARC Linkage Grant (LP0561160) involving Vanguard Investments Australia and
SIRCA. We especially thank Kathryn Wong for providing broker classification data. We also appreciate comments from
Terry Odean, Brad Barber, Wei-lin Liu, Andrew Jackson, Laura Starks, Sheridan Titman, Mark Seasholes and seminar
participants at The University of Texas at Austin, Massey University, Indiana University, Asian Finance Association
Brisbane Meeting 2009 and the 2008 FINSIA-Melbourne Centre for Financial Studies Banking and Finance conference.
This study would not have been possible without the provision of data from SIRCA and approval from the ASX of which
we are most gracious for.

Electronic copy available at: http://ssrn.com/abstract=1572146

 Discount brokerage firms attracted substantial individual investor business over the past two

decades. Aided by the internet and improving technology, brokers compete on cost and offer to route

investors' orders through to the electronic trading system of stock exchanges and other trading venues

for a typical fee of between five and twenty dollars.1 At their peak, Research and Markets (2006)

estimate that online individual investors accounted for nearly one third of the trading volume on the

NASDAQ and the NYSE. Discount brokers may also provide individual investors with market

information, data and analytical tools via the internet to support them in trading, however they do not

offer personal services. Individual investors who wants additional services such as investment

recommendations, trade suggestions and order execution services would need to hire a full service

broker who charge a minimum fee of about one hundred dollars, i.e. five to twenty times the cost of

using a discount broker. A question of practical importance to individual investors is whether these full

service brokers provide services that are commensurate with the additional fees that they charge. In

other words, has the lack of value in full service brokers' offerings driven individual investors to

minimize cost and migrated to discount brokers?

The literature provides only indirect and mixed evidence that could shed light on this question.

Several studies lead by Odean (1999) and Barber and Odean (2000) focus on data from a discount

brokerage house and find individual investors are over-confident, reluctant to realize losses, trade in a

correlated manner, and have a tendency to gamble.2 Thus, individual investors may find the investment

1
Retail brokers are stockbrokers that have individual investors as the primary clientele, as opposed to institutional brokers

who focus on institutional investors. For brevity, we refer to retail discount brokers as discount brokers, and to retail full

service brokers as full service brokers in this paper. Visit http://www.fool.com/how-to-invest/broker/fullcompare.aspx for a

typical pricing comparison between discount brokers.

2
See Feng and Seasholes (2004), Kumar and Lee (2006), Barber, Odean and Zhu (2008), and Dorn, Huberman and

Sengmueller (2008) for evidence of correlated trading. Kumar (2008) and Barber, Lee, Liu and Odean (2009) find evidence

of gambling behaviour.

Electronic copy available at: http://ssrn.com/abstract=1572146

and trading advisory services of full service brokers useful. Currently there is no direct evidence

comparing the characteristics of individual investor stock trades from different broker channels.

However, there is evidence from the mutual fund industry that suggests brokers’ personal services may

not always lead to better investment outcomes. In an important recent paper, Bergstresser, Chalmers

and Tufano (2007) find that mutual funds sold through brokers have higher costs, and these investment

vehicles do not perform well relative to mutual funds sold directly. Their results suggest that relatively

low skilled fund managers pay brokers to persuade clients to purchase their funds. Given the common

perception that individual investors are typically naïve and unsophisticated in their investment

decision-making, it remains an open question as to whether full service stockbrokers actually provide

value enhancing investment advice and execution services, or whether these premium services simply

exist as a marketing ploy for the purpose of generating higher brokerage commissions. We are able to

examine this question by using Australian Stock Exchange data over a 13 year period. This data

contains broker identifiers that allow us to distinguish between trades made by (1) individual investors

at discount brokerage firms, (2) trades made by individual investors at a full service brokerage firms,

and (3) trades made by institutional investors. The complete market coverage offered by a consolidated

limit order book market, and the longevity of this dataset, enable us to better generalize the findings to

the wider individual investor population. In addition, this data represents a stronger dataset than has

been used by others, such as in the case of studies that focus on small sample of stocks over a short

time period (e.g. Griffin, Harris and Topaloglu (2003)), a small number of brokers (e.g. Odean (1999)

and Barber and Odean (2008)) or that focus on individual investor trades identified to the NYSE (e.g.

Kaniel, Saar and Titman (2008)).

Our central finding is that the trades made by individual investors at full service brokerage

firms outperform trades made by individual investors at discount brokerage firms by 344 basis points

over yearly horizons. Controlling for risk differences reduces this differential to 252 basis points, but

this estimate is still highly significant. This 252 basis points difference is actually greater than the

Electronic copy available at: http://ssrn.com/abstract=1572146

typical commission difference between full service and discount brokers, suggesting that full service

brokers may even be able to create value net of expenses.

To obtain a better sense for exactly how full service brokers create value, we do a number of

additional tests. We compute intraday and long horizon trade performance of the limit order trades and

market order trades across the two retail broker channels. We find insignificant stock returns

conditional on discount broker market order trades. This is consistent with Seasholes and Zhu (2009)

who show that individual investors' purchases of local stocks underperform local stock sales and

conclude that individual investors from discount brokers do not possess private information. However,

we find positive stock returns conditional on full service broker market order trades which suggests

individual investors’ trades from this broker channel contains private information. This result is similar

to the findings of Kaniel et al. (2009) and Griffin, Shu and Topaloglu (2010). Our limit order trade

performance results contrast with Barber et al. (2009) who find individual investors lose more money

in aggressive trades. We find that only individual investors using discount brokers consistently earn

negative returns, and mainly in relation to intraday trading and "passive" limit order trades. Limit order

trades via full service brokers actually generate positive returns over the medium term.3 We also

investigate the trade performance difference around information announcements and exogenous change

in trading environments which again reveal differences in trade performance between the trade across

broker channels.

This study contributes to the rapidly growing individual investor literature by providing direct

evidence that brokerage services can have a significant effect on individual investor trade performance.

3
This latter difference in findings could be due to differences in market structure. Barber et al. (2009) study trading in

Taiwan which is dominated by individual investors, while trading in Australia and the U.S. are heavily dominated by

institutions. In addition, trading in Taiwan is conducted in a call market with frequent batched auctions, while trading in

Australia is facilitated by a continuous limit order book market, whereby passive trades in batched auctions are not identical

to limit orders in limit order book markets.

4
Attention placed on the broker channel utilized by individual investors enables a better understanding

of whether homogeneity in return outcomes really exists across all individual investors. Important

studies in the literature show that individual investors as a group suffer in their trading, particularly

when they trade aggressively (e.g. Odean (1999), Barber and Odean (2000) and Barber et al. (2009)).

However, Kaniel, Saar and Titman (2008) find positive returns subsequent to stocks exhibiting intense

individual investor buying on the NYSE and they believe this is due to individual investors earning a

premium by providing liquidity to institutional investors. Kaniel et al. (2009) and Griffin, Shu and

Topaloglu (2010) also find that individual investor trades predict returns after information

announcements, which suggests their trades possess private information.

Our results suggest that full service brokers provide individual investors with information and

execution advantages over individual investors who otherwise execute their trades with discount

brokers. We show that discount broker trades generate negative intraday and long horizon trade

performance, which is consistent with the findings of Barber and Odean (2000), while full service

broker trades generate positive trade performance over a 10-25 day horizon similar to those of Kaniel,

Saar and Titman (2008). In other words, full service broker trade performance bears similarities to

successful informed traders and liquidity providers while discount broker trade performance exhibit

uninformed investor characteristics, whereby they suffer from adverse selection. Our findings on the

differential stock trading performance across broker channels is qualitatively opposite to that of

Bergstresser, Chalmers and Tufano (2009) who find that mutual fund brokers do not deliver substantial

tangible benefits to clients.

This paper is also related to several other recent studies. The dual character of the trades from

full service brokers of being informed and liquidity providing trades that we document is direct

evidence supporting the experimental findings of Bloomfield, O'Hara and Saar (2005) that informed

investors trade aggressively when prices have not fully adjusted, but they also offer liquidity when the

price of liquidity is high. Lakonishok et al. (2007) find the options market activity among individual

5
investors differ by broker channels, but these authors do not directly examine specific hypothesis in

relation to the broker channel. Linnainmaa (2009) uses order type to explain the disposition effect. In

our study we use trade performance across broker channels, order types, and information environments,

as well as adjustments for the bid-ask spread, to study the value of the information and execution

services provided by full service brokers to individual investors. The spirit of our paper is similar to

Yan and Zhang (2009) who find that institutional investors are not a homogenous class of investors.

They document that the trades of institutions with short investment horizon are more informative than

those with longer investment horizon. Our findings support a finer partition of individual investors

based on the broker channel they use.

Our findings also have implications for market efficiency. The dominating trade performance of

full service broker trades over that of discount broker trades is qualitatively consistent with the costly

information market equilibrium model by Grossman and Stiglitz (1980). While our study is similar to

Kaniel, Saar and Titman (2008) and several other individual investor trading papers in that we do not

analyze the effect of commissions due to data limitations, we do know that commissions vary across

the brokers. Based on our prior research of institutional investors, websites and our telephone surveys,

we find commission rates in Australia range between 0.10 to 0.50 percent for institutional investors,

0.11 to 0.66 percent for discount brokers and 1-2 percent for full service brokers.4 These commission

rate differences would negate either all or part of the trade performance difference depending on the

holding period. Another way that this paper supports the concept of market efficiency is with respect to

a counterparty analysis, which illustrates that traders can earn long term abnormal returns only if they

4
Percentage brokerage depends on the trade size, ordering routing method and specific agreement. Internet trades are the

cheapest, followed by telephone trades. Brokerage across all firms is charged on a sliding scale with volume discount.

Discount brokers have a minimum fee of AUD$20-40 per trade and full service retail brokers charge a minimum of

AUD$80-100 per trade. Full service brokers often generate trade ideas and may charge a lower commission on trades that

they suggest but resulted in losses. The range indicated for retail brokers are valid for trades between AUD$10,000-50,000.

6
are better informed than their respective counterparty. While we find that institutional broker trades

earn positive intraday returns at the expense of both full service and discount broker trades, over the

longer horizons (over one month) full service broker trades and institutional broker trades earn

abnormal returns only when they trade against discount brokers. Trades between the institutional and

full service brokers yield zero long horizon returns.

The remainder of the paper is structured as follows. Section 2 develops the hypotheses. Section

3 details the ASX trading environment and data. Section 4 presents our results. Section 5 concludes.

1. Hypothesis Development
Stockbrokers provide several important services to individual investors, and our research

therefore relies on broker identifiers to distinguish between trades on the Australian Stock Exchange (a

consolidated electronic limit order market) on every trade over a thirteen-year period. Our study

examines the intraday and subsequent trade performance of discount brokers, full service brokers and

institutional brokers.5 We interpret these trade performance measures as a proxy of those of individual

investors using discount brokers, individual investors using full service brokers and institutional

investors, respectively. Griffin, Harris and Topaloglu (2003), Griffin et al. (2008) and Jackson (2003)

also use broker identifiers to identify the trades of individual and institutional investors and study their

5
Retail brokers are stockbrokers that have individual investors as their primary clientele, as opposed to institutional brokers

who focus on the institutional investors. For brevity, we refer to retail discount brokers as discount brokers and retail full

service brokers as full service brokers in this paper. We focus on individual investor since brokers identifiers are less useful

as a proxy of brokerage services provided to institutional investors. Investment managers typically use multiple brokers in

order to obtain research and access analysts as well as for hiding their true trade size. In addition, they could change their

commission rate as indirect payment of non-execution services. Furthermore, investment managers are full time market

professionals and often have their own trading desk focusing on execution. It is not clear how academic researchers could

assess the marginal contribution of institutional brokers to institutional broker trade performance.

7
performance. Linnainmaa (2007) validates this approach with Finish data containing both broker and

investor identifiers.

We test the hypothesis that full service broker trades outperform discount broker trades, and the

sub-hypotheses that the trade performance difference is due to information and/or execution advantages

of full service brokers. Our null hypothesis is that the trade performance of the two broker channels is

indifferent, meaning that the services of full service brokers are not much more than a marketing ploy

and trade generation exercise.

The information advantages that full service brokers could offer to individual investors include

faster access and better interpretation of price sensitive information. These information advantages

should be reflected in larger performance differences between full service and discount broker trades in

situations when information is important such as trades resulted from market orders6 (reflecting strong

conviction which could be resulted from being informed or naive), trades early in a trading day7 (when

overnight information is being absorbed into prices), and on corporate information announcement days.

Full service brokers observe market activity, broker identifiers, client order flows and corporate

news flow continuously. Therefore full service brokers may be better able to identify adverse selection

risk and liquidity induced price pressure relative to individual investors trading through discount

brokers. This ability may allow them to help their clients to reduce the likelihood of trading against

better informed traders which is particularly important in handling limit orders. Traders use limit orders

to achieve better prices by providing liquidity but these orders are also subject to adverse selection risk

from better informed traders. Consequently, if full service brokers are able to provide better execution,

their limit order trades should perform better that those of discount brokers.

6
See Barber et al. (2009) for performance difference between aggressive and passive trades in Taiwan. Chakravarty and

Matell (2005) and Hasbrouck and Saar (2009) also study the relationship between order type, information trading and

liquidity provision.
7
See Easley and O’Hara (1992) for the relationship between time of day and information-motivated trading.

8
 In addition to testing the above conjectures, we also study the trade performance across

counterparty pairs in order to better understand trade performance differences. If individual investors

trading via discount brokers suffer from being the least informed and worst in managing their orders,

they should be the primary source of returns for other investors in the zero sum game of trading. If

institutional investors are the most informed investors, institutional brokers should not incur persistent

losses when they trade against other broker channels.

Finally, we make use of an exogenous event, the removal of broker identifiers from the

Australian Stock Exchange trading system on 28 November 20058 to study a source of information to

full service brokers and control for investor heterogeneity across the broker channels. Since the broker

identifiers are only observed by the brokers and not the investors, to the extent that these broker

identifiers provides useful information to full service brokers to monitor liquidity conditions and

adverse selection risk9, its removal should reduce their ability to provide good execution service. That

is, the performance of limit orders of full service brokers should suffer after the removal of broker

identifiers. In contrast, large and informed investors should benefit from anonymity. We expect the

performance of institutional broker market order trades to improve in a more opaque market

environment.

2. Institutional Details, Data and Methodology

2.1 Trading Environment

The Australian Stock Exchange (ASX hereafter) operates a consolidated electronic limit order

book trading system. The ASX is the only significant stock exchange in the country and there are no

8
Both pre and post trade, i.e., broker identifiers are removed from the limit order book and the records of executed trades.

Comerton-Ford and Tang (2009) study the change in liquidity surrounding this event.
9
For instance, observing a sequence of trades from institutional brokers in the same direction could indicate informed

trading and permanent price movements. Pick off risk would be high relative to the benefit of providing liquidity.

9
designated market makers. Stock trades of more than AUD$ 1 million, or large portfolio trades, may be

arranged in the upstairs market by brokers. These upstairs trades are reported to the trading system as

off-market trades, and the majority of these transactions have the same broker acting for the buyer and

the seller.

The ASX market opens for trading from 10:00 am and operates as a continuous open limit order

book until 4:00 pm. The ASX uses call auctions to open and close the continuous trading session. The

exchange trading system terminals display in real time the full limit order book. Since 28 November

2005 the broker identifiers of every order as well as the buying and selling broker in every trade are no

longer observable by brokers and other market participants.

2.2 Trade Data and Market Level Statistics

We obtain the ASX trades data for the period 1 January 1995 to 31 December 2007 from the

Securities Industry Research Centre of Asia-Pacific (SIRCA). This data captures all trades which took

place on, or otherwise reported to, the exchange. Each transaction in the dataset consists of the

timestamp, ticker, price, bid and ask quotes just prior to each transaction, trade flags and buying and

selling broker identifiers. Trade flags indicate whether the trade was buyer or seller initiated trade, an

auction trade, or an off-market trade. We also source closing prices from SIRCA. Dividends,

capitalization adjustments, monthly returns and month-end share market capitalization data are sourced

from the Australian School of Business’ Centre for Research in Finance Share Price and Price Relative

Database (CRIF SPPR). Financial year-end book-value data is sourced from Aspect Financial.

Table 1 reports the turnover velocity10, total turnover and the number of trades per year, as well

as the average trade value and average trade price in each year from 1995 to 2007. Total turnover

during this period has grown 15 times from AUD$121 billion in 1995 to AUD$1,807 billion in 2007.

10
The turnover velocity is calculated as the year’s total turnover divided by the year end’s total domestic market

capitalization

10
The total number of trades has increased at an even faster pace, and as such, the average trade value has

fallen, from AUD$39,800 in 1995 to AUD$26,000 in 2007. Total Turnover during the thirteen-year

period is AUD$7.83 trillion. The turnover velocity of the market has almost tripled in this period from

34.13% to 105.65%. The increased turnover velocity is similar to the NYSE experience where turnover

velocity increased from 55.5% to 167.1% during the same period.11

2.3 Broker Classifications and Statistics

Jackson (2003) and Griffin, Harris and Topaloglu (2003) consider retail brokers trades as

individual investor trades. We use the same approach in identifying institutional and individual investor

trades. Linnainmaa (2007) uses the Finnish data that have both broker and individual investor trading

records to provide direct evidence supporting the use of broker identifiers for investor type

identification in transaction data. We follow this literature and collect broker activity information from

broker websites, the ASX publication on member firms from 1901-200112, newspapers archives, trade

magazine articles, and consult senior practitioners in order to accurately classify brokers. We classify

brokers into institutional, discount and full service brokers. Discount brokers are those that focus on

individual investors and offer trading services only and do not offer personal advice or in-house

research. Full service brokers are the other brokers that focus on individual investors.

Several recent papers (e.g. Griffin, Harris and Topaloglu (2003) and Hvidkjaer (2008)) use

inferred trade initiator and trade size as a proxy for individual investor trading. As a robustness check

of our classifications, we calculate the average price traded and average trade value and market share of

each broker every year. A broker is classified as a retail (discount or full service) broker in a year if its

average traded share price and average trade size is below the year’s average. If ambiguity occurs (i.e.

one measure is higher than the average, while the other measure is lower), we consider the broker’s

11
Sourced from the World Federation of Exchanges website (www.world-exchanges.org).
12
See http://www.asx.com.au/about/pdf/HstoricalMemberFirms.pdf.

11
past year’s classification, how far away the broker’s average trade size is to the yearly average and the

broker’s yearly market share to determine its classification. From this analysis, we verify that our

broker classifications are robust.

Table 2 reports the yearly number and market share of different brokers. Panel A shows that

there are 183 unique broker identifiers during our sample period and the first discount broker appeared

in 1995.13 The number of brokers remains stable over the sample period at about 90. However, this

overall stability masks the decline in the number of full-service brokers and the rise in the number of

discount brokers and institutional brokers.

Panel B shows that institutional brokers dominate the aggregated trade value on the ASX,

representing 82.62 percent of turnover over the sample period. The dominance of institutions on the

market landscape has been steady over time, despite institutional brokers comprising at most a third of

the total number of brokers. From 1995, discount brokers have been slowly gaining market share with

respect to turnover from 0.02 percent of turnover in 1995 to 8.17 percent in 2007. Meanwhile, full

service brokers have lost about a third of their market share during the same period, from 15.43 percent

in 1995 to 10.75 percent in 2007. However, the market share across all retail brokers has been stable

over time.

As a further robustness check of our identification of individual investors, Table 3 presents the

turnover of full service, discount and all individual investors by stock size. Every month from 1995 to

2007, the largest 300 stocks (considered the investible universe of securities by fund managers and

S&P) by month-end market capitalization are placed into six size groups by their respective market

13
The ASX (2006) Share Ownership Study reports that of the individual investors surveyed with direct investments in

shares, 54 percent use discount brokers (internet or telephone), 37 percent use full service brokers, 5 percent use a financial

advisor or other type of broker and 3 percent do not have a broker. These findings suggest individual investors

predominantly use retail discount and full service brokers for trading and not institutional brokers.

12
capitalization.14 Stocks outside the largest 300 are placed in a separate group while other stocks such as

preference stocks not in the CRIF SPPR (e.g. preference shares) are placed in another. The turnover

share of each investor group over the entire sample period is then calculated. The evidence is clear that

retail brokers accounts for an increasing fraction of total trading as stock size falls. For example, in

Panel C for all retail brokers, stocks ranked 201-250, 251-300 and outside the 300, account for 37.48,

45.77 and 75.3 percent of trading in these size groups, respectively. While institutions dominate about

83 percent of overall trading, individual investors represent a significant proportion of all dollar trading

volume in stocks ranked 200 and beyond (i.e. smaller capitalization stocks).15 Given that individual

investors tend to trade in small stocks (e.g. Barber and Odean (2000)) this result reassures us that our

broker classification can correctly identify individual investors.

3. Measuring Buys-Sells Performance Across Broker Channels

We measure the trade performance of a broker channel over various intervals by computing the

return difference between buys and sells stock portfolios on a daily basis; similar to Barber et al. (2005)

and Barber et al. (2009). This methodology starts with computing the net volume of a broker channel in

a stock on a day as the total number of shares bought less the total number of shares sold. We then

assign the stock to the buys (sells) portfolio of the broker channel on that day if the net volume is

positive (negative). We compute the value-weight average performance of the buys and the sells

portfolios separately and subtract the sells portfolio performance from the buys portfolio performance

to determine the trade performance of the broker channel. This procedure yields a positive trade

performance measure for the day if the stocks that the broker channel purchased outperform the stocks

14
The largest 300 stocks on the ASX are the most actively traded and represent about 90% of total market capitalization.
15
In unreported results, we also group trades by trade price and find a similar increase in individual turnover share in price

groups with declining price. For example, 87.45% of trades of stocks with prices 20 cents or less are made by individual

investors.

13
that it sold. We present statistics computed over the time series of these portfolios at the broker channel

level.

3.1 Intraday Returns

Intraday returns provide valuable insights into the short-term performance difference between

broker channels which is particularly useful for assessing the information advantages across them over

the short horizon. We compute the intraday return, i.e. the return on day 0, by marking every trade via

a broker channel in a stock to the closing price and divide this profit (marked-to-close value) by the

dollar value of the net trade (net value) of that broker channel in that stock. Computationally, we define

the intraday return for broker channel p in stock i on day t as follows:


Qty_Boughti,p,t  Closing_Price  Price_Bought  Qty_Sold 
 Closing_Price  Price_Sold
i, t
 (1),
 
i, t i, p, t i, p, t
IntradayReturni,p,t  i, p, t

Abs Qty_Bought  Qty_Sold  Closing_Price

i, p, t i, p, t i, t

where Price_Bought is the total gross buy value of stock i on day t by the broker channel p

divided by the total number of shares bought. The intraday return of a broker channel on the buys

portfolio on a day is the value-weighted16 average intraday returns across stocks where (Qty_Bought –

Qty_Sold)>0. We define Price_Sold and the intraday return of the sells portfolio analogously. The

return difference defined as the buys portfolio return minus the sells portfolio return forms the time

series of returns that we use to compute the trade to day’s close column in Table 4-6.

We perform robustness checks of our results against bid-ask bounce. In order to address the

effect of bid-ask bounce17 on intraday return, we calculate mid to mid close returns by replacing the

16
The value is the net value of trades defined as Abs(Qty_Bought – Qty_Sold) x Closing_Price.
17
Porter (1992) and Aitken et al. (1995) show that transactions at the close tend to occur at the ask price. As such there may

be a negative bias in daily profit and return calculations for seller initiated trades at the bid price and using the closing price

14
trade prices used to compute Price_Bought, Price_Sold and Closing_Price in (1) with the midpoint of

the bid-ask quotes just prior to those corresponding trades. Brokers who initiate trades buy using

market orders will incur the liquidity cost that equals to one half of the bid-ask spread. Brokers who

offer liquidity by using limit orders receive the half spread as compensation. Mid to mid close returns

have two properties by construction: they focus on the proportion of returns due to the movements in

the mid-point of bid-ask quotes (a proxy of equilibrium price), and brokers that use more market orders

relative to limit orders will have lower trade to day’s close returns relative to mid to mid close returns.

3.2 Cumulative Returns and Risk Adjustment

In order to assess longer horizon trade performance beyond the trade day, we compute daily

stock returns and risk-adjusted returns subsequent to day 0 based on the closing price, dividends and

capitalization change information. We adopt the characteristic selectivity (CS) benchmarks of Daniel et

al. (1997) and Pinnuck (2003) to compute risk adjusted returns.18 The daily characteristic selectivity

return is the daily return of a stock less the daily return of benchmark stocks with similar size, book-to-

market and momentum characteristics. We combine the compounded daily returns over a particular

interval and the intraday returns to produce cumulative returns at a broker channel and stock level. We

then follow the procedure described above to aggregate these cumulative returns across stocks to the

broker channel portfolio level and compute the return difference between the buys and the sells

portfolios for analysis. We report the results based on cumulative returns inclusive of intraday returns

as trade to n days in the tables. Our returns measure allows us to examine intraday and subsequent

as the benchmark. Frino et al. (2005) show that bid-ask bounce explains the positive abnormal return of ASX block trade

sales from the trade to day’s close.

18
While Fong, Gallagher and Lee (2008) propose the use of an index-adjusted characteristic-based benchmark, our analysis

of the entire ASX universe of stocks makes the Pinnuck (2003) benchmark more suitable. We also compute the four-factor

Carhart (1997) risk-adjusted returns which show similar results.

15
returns, separately and jointly. Kaniel, Saar and Titman (2008) and Barber et al. (2009) focus on the

close to close cumulative returns from day 1 onwards which does not consider the returns experienced

by individual investor on the day of trade. To the extent that intraday returns are large relative to

subsequent returns, including intraday returns in cumulative returns calculation may change the

conclusion of individual investor trade performance.

4. Results

4.1 Individual Investor and Broker Channel Trade Performance

We report the cumulative return differences between the buys and sells portfolios by broker

channel in Table 4. Panel A shows the intraday and cumulative returns while Panel B shows the

corresponding characteristic-selectivity returns. The T-M column in Panel A measures the difference

between trade to day’s close returns and mid to mid close returns, i.e. the effect of bid ask spread.

Intraday returns are not risk-adjusted, hence they are identical across the two panels. The parentheses

contain the Newey-West t-statistics.

There are four broker channels in this table: full service, discount, all retail and all institutional.

The all retail group pools the trades of full service and discount brokers, thus it represents the trades of

all individual investors regardless of the brokerage houses that they use. For completeness and

consistency with subsequent tables we also show the all institutional broker channel which represents

the trades of institutional investors and the returns is a mirror image of the returns of all retail by

definition given the zero sum nature of trading.

Consider the returns of All Retail broker category in Table 4 Panel A which can be compared to

the individual investor trade performance findings in the literature. The intraday returns of all retail

broker trades are significantly negative at -0.3 percent. The adjustment for bid-ask spread result in an

almost identical intraday returns of -0.29 percent. This finding indicates that individual investors lose

to institutional investors on intraday trading. Furthermore, the statistically significant and negative T-

16
M suggests that individual investors tend to use more market orders than limit orders. The cumulative

return that individual investors earn by the end of day 1 (Trade to 1 day column) remains negative

before risk adjustment, but becomes slightly positive after risk adjustment. At the 10 day horizon point,

individual investors as one group experience a positive and statistically significant return on their buys

minus sells portfolio. However, this positive cumulative mean return fades to insignificance over

subsequent periods.

The return pattern of all retail brokers suggests that the interaction between individual and

institutional investors at an aggregate level is limited to the short to medium horizon. This is in

agreement with Kaniel, Saar and Titman (2008) who find NYSE individual investors trade in a

contrarian manner and their trades predict returns over the subsequent two weeks.19 Our results are in

contrast to the findings of Barber et al. (2009) in the Taiwan market where individual investors

dominate trading and, as a group, suffer permanent losses to institutional investors. A plausible

explanation of our findings is that institutional investors have private information of their trading needs

and hence they have an intraday information advantage. In a developed market where institutional

investors dominate trading, they split and execute large orders and move prices. Individual investors

attempt to gain from the biased order flow and prices "overshoot". However, individual investors are

not able to perfectly determine who is trading and the size of institutional trading demand, hence they

incur initial losses due to this information asymmetry. When the price impact of institutional trades

reverses over subsequent days, individual investors recover their initial losses and earn a small positive

return over a 10 day horizon. This explanation extends Kaniel, Saar and Titman (2008) liquidity

provision hypothesis by accounting for the negative intraday return incurred by individual investor

which reflects the risk in liquidity provision trading strategies due to information asymmetry.
19
Kaniel, Saar and Titman (2008) focus on the return difference between the extreme decile portfolios formed by sorting

stocks based on net individual investor trading over weekly windows. Our method uses daily aggregation in order to

accurately measure and relate intraday and subsequent returns of all trades across all stocks.

17
 Relative to the return pattern of all retail broker trades, the contrast between full service and

discount broker trade performance is striking: full service broker trade performance dominates the

performance of discount broker trades at every return interval. This result supports our primary

hypothesis that full service broker trades outperform discount broker trades. While both retail broker

channels experience negative intraday returns, full service broker trades will have much smaller

negative returns. The trade to day’s close intraday returns for full service broker trades is -0.06 percent,

which compares favorably to the -0.51 percent of discount broker trades. Bid-ask spread adjusted mid

to mid close returns show consistent results. The adjustment leads to a smaller loss to full service

brokers and a larger loss to discount brokers, indicating that full service brokers have more trades

executed with market orders than limit orders while discount brokers use the opposite strategy.

The cumulative returns of full service broker trades become positive from day 1 and further

increases as the return interval extends while those of discount broker trades remain negative. In terms

of statistical consistency, the t-statistics of full service broker trade performance peak at trade to 10

days and decrease as the return interval extends, which indicates that the most reliable source of returns

for full service brokers is in that short-medium horizon. The magnitude of the t-statistics of discount

broker trade performance is the largest at intraday returns and it declines substantially as the return

interval extends, which indicates that discount broker trades perform worst on day 0. Risk adjusted

returns tell the same story, i.e., full service broker trades outperform discount brokers trades and the

statistical power drops as the return interval extends.

The significantly distinct full service and discount broker trade performance is intriguing and

suggests that brokerage services matter, as we hypothesize. However, the economic and statistical

significance as well as the persistence of the trade performance differences leads us to ponder on their

implications for market efficiency. The mean trade performance difference between the two groups is

0.45 percent intraday, 1.24 percent (0.69 percent risk adjusted) at 10 days and 3.44 percent at 254 days

(2.52 percent risk adjusted). How can individual investors, even with the help of full service brokers,

18
generate consistent returns that are more positive than those of institutional brokers? Surely

institutional brokers generate larger commission revenue than individual investors and should get even

better information and brokerage services. How can individual investors who use discount brokers

consistently buy stocks that perform worse than the stocks that they sell? Are they losing more because

of their naive aggressive trades as Barber et al. (2009) suggests? Couldn’t some investors do better by

following the opposite strategy and make money?

One observation to emphasize is that individual investors at the aggregate level do not appear to

be particularly informed or disadvantaged relative to institutional investors, as the all retail broker

results indicate. Thus, the superior performance of one of the two constituent groups of individual

investor trades (those who use full service brokers) must be accompanied by the inferior performance

of the other group (those who use discount brokers). However, this “accounting identity” does not

explain why or how full service broker trades outperform discount broker trades. We address this issue

in the following sections.

4.2 Information and Execution Advantages: Performance of Market and Limit Order Trades

In order to study the source of trade performance differences between the two retail broker

channels, we partition the trades by whether a broker channel uses a market order to initiate a trade

(market order trades) or uses a limit order of which the counterparty initiates the trade (limit order

trades). High conviction traders, including those who possess an information advantage are likely to

prefer sure and immediate execution by initiating trades with market orders (e.g. Anand, Chakravarty

and Martell (2005) and Hasbrouck and Saar (2009)). By calculating whether market order trades of full

service brokers generate positive performance and outperform those of discount brokers, we can

determine whether full services brokers have an information advantage relative to discount brokers.

Alternatively, if the trade performance difference is due to discount brokers systematically initiating

19
trades to buy stocks that would underperform and selling stocks that would do relatively well (e.g.

Barber et al. (2009)), we should observe negative returns in discount broker market order trades.

Better trade execution is another potential source of trade performance. Limit orders offer other

traders the opportunity to trade and earn the bid-ask spread as a result of providing liquidity to other

traders. However, limit order traders risk losing to better informed traders, such as institutional brokers

splitting large orders. If full service brokers are able to better monitor market conditions and avoid

trading against better informed traders, then their limit order trades should earn higher returns than

those of discount brokers.

Table 5 shows the market and limit order trade performance. Panels A and B present the

holding period returns of market and limit order trades respectively. Panels C and D list the

corresponding results after risk-adjustment. Figure 1 plot the key findings in the table: the cumulative

returns of market and limit order trades across broker channels based on Table 5 Panels A and B. The

solid lines are for the cumulative returns of limit order trades while the dashed lines are for market

order trades. The bolded lines are for full service brokers while the thinner lines are for discount

brokers. The graph clearly demonstrate that the market order trades of full service brokers predict

future returns but those of discount broker trades are hardly related to future returns yet they incur

negative intraday returns. The limit order trades performance difference across the two broker channels

are equally clear. The limit order trades of full service brokers generate positive returns between 10 and

25 days and appear to breakeven at other horizons. However, the limit order trades of discount brokers

earn negative returns from day zero and this negative returns extends over time. Furthermore, the

magnitude of the negative returns that discount broker limit order trades suffer over the one year

horizon dominates those from market order trades. The return estimates, t-statistics, and risk-

adjustments in Table 5 show consistent results.

The inference that we draw from the trade performance results in Table 5 is that individual

investors using full service brokers enjoy a significant information advantage as well as an execution

20
advantage over individual investors using discount brokers. They appear to be potentially both

successful informed traders and liquidity providers. In contrast, individual investors trading using

discount brokers appear to be uninformed traders and suffer from pick-off risk by better informed

investors.

4.3 Time of the Day Effect

In order to provide further evidence to characterize the relative trade performance across broker

channels, we consider the time of the day effect. Both information and execution advantages are related

to adverse selection risk. Easley and O’Hara (1992) and Madhavan, Richardson and Roomans (1997)

establish that adverse selection risk is higher early in the trading day when it would be attractive to

informed traders because there is less time for information dissemination and less time for price

discovery through trading. Thus, if full service brokers possess information (execution) advantages

relative to discount brokers, their market (limit) order trades should outperform those of discount

brokers, and more so early in the trading day. Therefore, in addition to partitioning trades by order type

we also partition trades by the hour of the day.

There are a large number of statistics when we partition the sample by order type and time of

the day. In order to focus the discussion and highlight patterns, we present the trade performance

results graphically. We divide a trading day into whole-hourly intervals and exclusive of auction trades

in the opening and closing of trading. Figure 2 shows the average cumulative returns and the

corresponding t-statistics of market order trades by the hour of the day and Figure 3 shows those of

limit order trades.

Figures 2a and 2b demonstrate that the full service broker market order trades performed well.

While the intraday returns of full service brokers are negative except for those executed in the first hour

of trading between 10:00-11:00, these cumulative returns are generally positive from day 1 and

increase as the horizon extends. The cumulative returns are about 0.5 percent between 10-25 days and

21
they increase slowly over the next 200 days to about 1 percent. The t-statistics suggest that the negative

intraday returns are statistically significant and the most consistently positive cumulative returns are

those between 10 to 25 days. The t-statistics of cumulative returns fall noticeably after 25 days. These

findings show that full service brokers are not masters of intraday information and the information that

they can rely on mostly requires about 10 to 25 days to be reflected in trade performance. We also

observe that the cumulative returns and t-statistics decrease over the course of the trading day, possibly

as prices reflect information events more accurately later in a trading day and erode the information

advantage of full service brokers. In summary, these results suggest that full service brokers are

informed traders, i.e., they are able to process and trade on information that have long-term return

implications.

Figures 2c and 2d illustrate the returns of discount broker market order trades. These trades earn

negative returns from the day of trade to 254 days after the trade, with a relatively narrow return range

of -0.05 to -0.65 percent. Their average intraday returns across trading hours are about -0.4 percent,

worse in earlier hours of the day, and there is no noticeable subsequent consistent change in mean

cumulative returns across trading hours. However the t-statistics suggest that the very consistent

negative intraday returns of discount broker market order trades are slowly compensated by the returns

over the next 10 to 140 days in that the t-statistics of cumulative returns drop from about -25 for trade

to day’s close to about -2 for trade to 140 days. These results confirms that individual investors that use

discount brokers are not well informed, nor are they able to accurately assess the value of information

and then trade accordingly. However, they are not systemically initiating buy trades in stocks that

would underperform subsequently, nor are they initiating sell trades in stocks that would outperform

subsequently. Most of the losses are due to intraday performance. The combination of the negative

intraday returns, lack of subsequent cumulative return trends and declining magnitude in t-values is

consistent with these traders trading on stale information. They appear to be able to distinguish good

22
and bad news though initiate trades when prices have more than fully incorporated the value of

information.

Figure 3 shows the limit order trades performance of full service and discount broker trades. As

seen in Figure 3a, full service broker limit order trades earn negative intraday returns (except those

during the last hour of trading) but they generate positive and statistically significant returns over 10-25

day horizons. The t-statistic pattern shown in Figure 3b suggests that the reliability of the subsequent

stock returns start to decrease after the 10 day horizon and becomes statistically insignificant from 140

days onwards. This evidence confirms that individual investor trading via full service brokers may be

able to supply liquidity and earn a profit over a two week horizon. However, the evidence is not

consistent with these investors trading profitability as day traders or engaging in profitable market

making. By contrast, Figure 3c shows that discount broker limit order trades generate negative intraday

returns, and in larger magnitude during the early trading hours. The t-statistics pattern of Figure 3d

shows that the most consistent losses are over the immediate horizon of up to 1 day. The statistical

significance of their negative returns are lower over time, although the negative returns continue to

grow in magnitude. Taken together, the evidence confirms that discount broker limit order trades suffer

from adverse selection and that their trades are being picked off. This interpretation is consistent with

the view that these individual investors have little skill, time and information to successfully manage

their limit orders.

4.4 Trade Performance by Counterparty Pairs

Our results have so far shown that i) individual investors as a group (retail broker trades) lose to

institutional investors at intraday trading, but recoup their losses over the next 10 days; ii) the full

service broker trades do well but discount broker trades perform poorly; and iii) the market and limit

order trade performance comparison supports both full service broker information and execution

advantages as explanations of the variation in trade performance across broker channels. This section

23
considers the buy minus sell portfolio returns across counter-party pairs in order to further examine the

brokerage services explanation.

If full service brokers provide individual investors information or execution advantages over

those using discount brokers, we should observe that full service broker trades generate positive trade

performance when the counterparty is a discount brokers. Furthermore, if institutional investors are the

most informed investors, they should gain when the counterparty of their trades emanate from either a

discount or full service broker. In addition, it is reasonable to expect the lack of institution investor

participation in the trading a stock could lead to a lower level of information efficiency and slower

price adjustments. Therefore, trends in returns over the longer horizon should be concentrated in trades

or stocks with a higher level of uninformed individual investor participation, such as small stocks and

trades involving discount brokers and trades between discount and full service brokers.

Table 6 reports the intraday and cumulative trade performance across the three counterparty

pairs: discount/institutional, full service/discount and full service/institution. In Panel A, the first row

discount/institution represents the return on the portfolio where discount brokers bought from

institutional brokers minus the return on the portfolio where the discount brokers sold to institutional

brokers. The -0.40% trade to day’s close returns in the All Stocks sample indicates that the stocks that

discount brokers bought from institutional brokers generate lower returns than the stocks that they sold

to institutional brokers. This poor trade performance recovers slightly over the next 10 days but

worsens as the return horizon further extends. Discount broker traders also perform poorly when their

counterparties are full service brokers. The stocks that full service brokers bought from discount

brokers generate 0.67% higher returns than the stocks they sold to discount brokers on the day of trade.

This performance difference extends to 3.39% over the next 254 days. By contrast, the trade

performance of full service brokers, when the counterparties are institutional brokers, do not show one

broker channel dominating the other conclusively. Full service broker trades earn negative intraday

performance, which then reverse to become positive returns over 10-25 day horizon, and insignificant

24
returns thereafter. This is consistent with the liquidity demand-supply relationship between these

broker channels.

The comparison between trade performance between the large and small stock subsamples

supports our hypothesis that brokerage services and market efficiency drives trade performance

difference. The trade performance of discount brokers is worse both in magnitude and statistical

significance in the Outside 300 stocks relative to the Largest 300 stocks, particularly over the longer

horizons. Longer horizon trade performance differences are largest in trades between the two individual

investor groups, which are more likely to relate to stocks with the lowest level of information

efficiency. Table 6 Panel B shows that the risk adjusted returns and return patterns being consistent

with the unadjusted returns results in Table 6 Panel A.

4.5 Corporate Information Announcements and Anonymous Trading

In this section we study the marginal effect of two types of exogenous events on broker channel

trade performance in order to provide further corroborating evidence of the information and execution

advantages of individual investors using full service brokers relative to those using discount brokers.

Specifically, we examine the effect of the announcements for price sensitive corporate information

revealed to the market, and the removal of broker identifiers from the trading system on the trade

performance of the broker channels.

When a listed company announces price sensitive information in Australia, companies need to

broadcast the news first via the Australian Stock Exchange. We consider two types of information

announcements; those announced during trading hours and those outside of trading hours. While it is

reasonable to expect institutional and full service brokers are aware of announcements during trading

hours, individual investors using discount brokers may not be well informed about the existence and

timing of these announcements. To the extent that full service brokers and institutional brokers could

help their clients to pick off stale limit orders, we expect discount broker limit order trade performance

25
would be adversely affected by price sensitive information announcements during trading hours, while

full service and institutional broker market order trades would benefit from such announcements.

Furthermore, if individual investors are less skillful than institutional investors and full service brokers

in terms of interpreting the price implications of information announced before trading begins, we

expect the performance of discount broker (limit and market) trades to be adversely affected by

announcements before trading hours.

Thus far, we have argued that full service brokers have execution advantages in managing limit

orders with respect to individual investors that use discount brokers, because full service brokers are

better able distinguish between liquidity shocks and informed trading by monitoring market activity.

Clients of discount brokers however do not have access to information such as the broker identifiers

associated to orders and trades and even with such market information, may be time and skill

constrained to make use of it. Accordingly, the removal of broker identifiers from the trading system

after 28 November 2005, should have a negative effect on the performance of the limit order trades of

full service brokers but have no or little effect on discount broker limit order trades. Furthermore,

anonymous trading allow large and informed traders such as institutional investors to hide their

presence in the market better, hence it should improve the performance of institutional broker market

order trades.

The removal of the display of broker identifiers from the trading system also serves as a useful

instrument for controlling the effect of trader heterogeneity in driving the performance differences

across broker channels. While there is a possibility that smart investors might self select to engage full

service brokers, hence driving the superior trade performance of full service brokers, it is also plausible

that smart investors do not need full service brokers’ advice, and that they would self select to trade

through discount brokers. Furthermore, it is implausible for smart investors to pay higher commissions

and not to expect tangible benefits. Overall, there is a convincing argument to expect the average

intelligence of investors using various broker channels to be different. Nevertheless, given that we do

26
not have investor level data, we cannot address the issue of investor heterogeneity directly. However, in

the absence of a theory for investor migration due to the stock exchange becoming anonymous and that

since observing the broker identifiers is the privilege of brokers and not of their clients, the change in

trade performance associated with the exchange becoming anonymous could only be attributable to the

change in the benefit of hiring a full service broker.

In order to test these conjectures we need to allow for stock and date specific variables.

However, in the cross sectional setting Barber and Odean (2008) identify that the attention or ‘glitter’

factor of stocks also has an adverse effect on individual investor trade performance. Consequently we

use a regression model to control for the effect of glitters in assessing the impact of anonymous trading

and information announcements on the broker channel trade performance.

In this analysis, we alter our the trade performance measure from returns to profit in the cross

sectional regression because we need to preserve the magnitude of net buys and sells across stocks at

the stock and date level. We incorporate these relative magnitudes in the previous analysis by net value

weighting the returns across stocks. The resultant model that we estimate is as follow:

AProfit i,p, t  α 0  β1 Anonymity  β 2 PreAnn i, t  β 3 Ann i,t  β 4 Market_Volt  β 5 Logcapi,t 1

 β 6 Aord52Weeki, t 1  β 7 StockVoli, t 1  β 8 WeeklyTurnoveri, t 1  β 9 Absmom6week i, t 1 (2)
 β10 Absmom12month i, t 1  β11Stock52Week i, t 1  β12 Buy i,t  ε i,p,t

AProfti,p,t is p broker channel's risk-adjusted dollar profit in stock i on its trades on day t,

measured by multiplying the sum of intraday return and characteristic selectivity return over period t

multiplied by the net value of trade.

The key variables of interests are:

Anonymity is a dummy variable that equals 1 during the period where broker identifiers were no

longer displayed in order books or executed trades, i.e. after November 28 2005, 0 otherwise.

PreAnni,t is a dummy variable that equals 1 if a price sensitive announcement is made by the

company between the end of trading on day t-1 and the start of trading on day t, 0 otherwise.

27
 Anni,t is a dummy variable that equals 1 if a price sensitive announcement is made by a stock

during trading hours on day t, 0 otherwise.

The control variables that proxy for the glitter effect are as follows:

Market_Volt is the absolute difference between the markets high and low level on day t, over

the market’s opening level. The All Ordinaries index is used as the market proxy.

LagCapi,t-1 is the past month’s log market capitalization.

Aord52Weekt-1 is the absolute return of the All Ordinaries Index previous day’s closing level

divided by the midpoint of the past 52 week’s All Ordinaries highest and lowest closing levels.

Formally:

Aord52Weekt-1 = Abs(Closet-1/(52WeekHight-1+52WeekLowt-1)/2)-1 (3)

StockVoli,t-1 is the standard deviation of the past 180 day’s stock volatility

WeeklyTurnoveri,t-1 is the moving average past week’s dollar turnover in stock i divided by the

stocks past month’s market capitalization.

Absmom6weeki,t-1 is the past six weeks absolute return of a stock

Absmom12monthi,t-1 is the past twelve month absolute return of a stock

Stock52Weekt-1 is an analogous measure to Aord52Weekt-1 but for each stock

Table 7 reports the coefficient estimates of the key variables of interest by broker channel and

trade type over various horizons. The impact of the removal of broker identifiers from the trading

system is consistent with our conjecture that the limit order trades of full service brokers are adversely

affected (-$384 per stock over the 10 day horizon and -$6,564 over 254 day horizon) while the

institutional broker market order trade performance improves (by the same order of magnitude). This is

evidence that full service brokers used information from broker identifiers to reduce the pick-off risk of

their limit orders and anonymity helps institutional investors to hide their longer horizon informed

trading. Interestingly, discount broker limit order trade performance is also adversely affect by

28
anonymous trading, but to a much lesser extent relative the damage to full service brokers both in terms

of magnitude and statistical significance.

In terms of the impact of information announcements, we observe significant short term losses

by discount broker limit order trades and gains to full service broker market order trades when there are

announcements during trading hours. Information announcements prior to the opening of trading also

has a strong negative impact on discount broker trade performance, which is consistent with our

conjecture of their poor information interpretation ability. In contrast, institutional broker trade

performance is not related to information announcements.

Overall the results from the analysis of the effect of anonymous trading and information

announcements support our overall result that full service brokers provide valuable services to

individual investors.

4.6 Other Robustness Checks

We argue that individual investors trading via full service brokers are informed traders but also

provide liquidity while individual investors trading via discount brokers are uninformed (noise) traders

and suffer from adverse selection. A characteristic of liquidity providers is that their net trades are

negatively related to other traders’ needs and their own past net trades. In unreported results, we

consider the time series property of the net trades by broker channel and estimate a VAR model. The

coefficients on all lagged net trades across broker channels are negative for full service (and

institutional) broker net trades but positive for discount broker net trades. This result supports the

liquidity provision role of full service brokers and suggests that discount brokers are trend chasers and

followers. A full scale investigation of the drivers of the trading direction of investors by broker

channels is outside the scope of this study.

We also cast our study using the weekly Fama-Macbeth regressions methodology of Kaniel,

Saar and Titman (2008) and the results on the ability of investor net trade to predict one week ahead

29
future stock returns are consistent with our findings. Specifically, intense full service broker net trades

in a week is positively related to future stock returns but those of discount brokers do not.

Finally, one might suspect that individual investors are particularly active in initial public

offering stocks and this contributes to the different in performance. We repeated our analysis after

removing all stocks with less than twelve months of trading history and find results that are

quantitatively similar and qualitatively identical.

5. Conclusions
We study the effect of the broker channel on individual investor trade performance by

measuring the trade performance of full service brokers and discount brokers using all trades over a

thirteen year period from the electronic limit order book market of the Australian Stock Exchange. We

find full service broker trade performance dominates discount broker trade performance. Full service

broker limit order trades generate negative intraday returns which become positive over a 10 day

horizon, then drift to zero over longer horizons. Discount broker limit order trades generate negative

intraday returns which deepen over time. This is evidence that the full service broker limit order trades

suffer less adverse selection problem than those of discount brokers. Full service broker market order

trades earn negative intraday returns which become permanent positive returns over 10-25 day

horizons. Discount broker market order trades also generate negative intraday returns but there is no

subsequent drift or reversion. This is evidence that full service broker market order trades have medium

term information but those of discount brokers do not contain future stock return information.

The negative intraday returns of both broker channels that serve individual investors reflect the

informational superiority of institutional investors. Our counterparty trade performance analysis further

shows that full service and institutional broker trades benefit at the expense of discount broker trades,

and that this performance transfer is larger over longer horizons when stock price is less efficient, i.e.,

in small stocks and in trades that involve only individual investors. We also discover additional

30
evidence of the information and execution advantages of full service brokers, which include higher full

service broker market order trade performance, and worse discount broker limit order trade

performance. These results are supported around information announcements, as well as for

anonymous trading weakening full service broker limit order trade performance and strengthen

institutional broker market order trade performance. Overall, our results suggest that full service

brokers provide individual investors with information and execution advantages relative to individual

investors using discount brokers.

Many interesting questions concerning individual investor trading remain to be explored. Issues

such as the aggregation of individual investor trading across stocks, and their gambling tendencies, are

extensions that could be better addressed with a complete set of finer investor clientele data, such as

one that contains the type of broker used. At the order level, the order strategies of investors with

different monitoring capacity should differ in equilibrium. Our results suggest that discount broker

clients may not have placed their orders far enough from the best bid and offers, given their monitoring

intervals. However, much empirical work needs to be done to better understand these implications. In

addition, research is needed to explain why full service stockbrokers improve the investment outcomes

of individual investors, while mutual fund brokers and financial advisors don't.

31
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34
 Table 1
Summary Statistics
This table reports the turnover velocity, total turnover (in billion Australian dollars, number of trades, average trade value of
each trade and average trade price of all trades in the ASX SEATS database by year. The turnover velocity is calculated as
the annualized average total turnover for a given month, divided by the month-end’s total market capitalization. The sample
period is from 1995 to 2007.
Turnover Velocity
Year Turnover ($Billions) No. Trades (millions) Avg. Trade Value ($) Avg. Trade Price ($)
(%)
1995 34.13 120.55 3.03 39800 2.73
1996 39.93 169.17 4.27 39600 2.52
1997 43.33 212.46 5.40 39300 2.87
1998 44.62 245.75 6.19 39700 3.63
1999 47.43 308.05 9.71 31700 2.99
2000 52.57 390.07 13.79 28300 2.55
2001 64.53 487.08 12.92 37700 3.82
2002 73.57 552.34 13.63 40500 3.76
2003 76.77 582.22 15.78 36900 2.74
2004 78.78 755.97 18.63 40600 2.84
2005 86.59 973.57 25.98 37500 3.35
2006 90.79 1230.00 38.32 32100 3.42
2007 104.12 1806.55 69.54 26000 3.56
All 64.40 7833.78 237.20 33000 3.24

35
 Table 2
Institutional and Individual Broker Count and Market Share by Year
Every year from 1995 to 2007, we use broker identifiers from the ASX SEATS database to represent each brokerage firm.
Brokers are classified as institutional and retail brokers as defined in Section 2.3. Panel A reports the number of brokers,
Panel B the market share of turnover.
Panel A. Broker Count Panel B. Market Share of Turnover (%)
Full All Full Discount
Year Discount All Retail Institutional All Retail Institutional
Service Brokers Service Retail
1995 70 1 71 21 92 15.43 0.02 15.45 84.55
1996 72 2 74 19 93 16.66 0.22 16.88 83.11
1997 71 5 76 18 94 14.01 2.28 16.29 83.71
1998 70 8 78 18 96 12.48 2.80 15.28 84.72
1999 62 10 72 20 92 11.47 5.23 16.70 83.30
2000 58 11 69 25 94 10.38 5.89 16.27 83.73
2001 55 14 69 26 95 7.49 5.26 12.75 87.26
2002 52 13 65 27 92 9.43 5.48 14.91 85.09
2003 43 13 56 29 85 8.93 6.69 15.62 84.39
2004 42 12 54 30 84 9.97 7.25 17.22 82.78
2005 45 13 58 27 85 10.99 7.92 18.91 81.09
2006 45 13 58 31 89 11.07 8.13 19.20 80.80
2007 45 13 58 33 91 10.75 8.17 18.92 81.08
All 106 18 124 59 183 10.68 6.70 17.38 82.62

36
 Table 3
Turnover Share of Individual Investors by Size Group
Every month from 1995 to 2007, the largest 300 stocks by month-end market capitalization are ranked and placed into six
groups. Stocks outside the largest 300 are placed in a separate group while preference shares and miscellaneous stocks such
as preference stocks not in the AGSM SPPR are placed in another. The institutional and retail broker turnover share are
calculated for each broker channel (see Section 2.3 for broker definitions). Turnover is defined as the sum of buy and sell
trades divided by two. The table reports turnover share as a percentage of total turnover in a size group, percentage of
turnover in a size group over total turnover on the ASX and the Australian dollar turnover in a size group. Turnover shares
for discount, full service retail broker and all brokers(discount and full service) are reported in Panels A, B and C
respectively.
Panel A. Full Service Brokers
Turnover Share in Size Overall Turnover Share
Size Group Turnover ($Billions)
Group (%) (%)
Unaccounted (e.g. Pref. shares) 9.67 0.25 19.94
Outside 300 43.90 1.60 124.87
251-300 28.25 0.32 24.74
201-250 23.83 0.42 32.99
151-200 18.58 0.58 45.24
101-150 14.34 0.79 62.05
51-100 10.58 1.49 116.46
1-50 7.67 5.23 408.91
ALL 10.68 10.68 835.19
Panel B. Discount Brokers
Turnover Share in Size Overall Turnover Share
Size Group Turnover ($Billions)
Group (%) (%)
Unaccounted (e.g. Pref. shares) 6.79 0.18 14.00
Outside 300 31.40 1.14 89.30
251-300 17.51 0.20 15.34
201-250 13.65 0.24 18.90
151-200 10.76 0.33 26.18
101-150 7.99 0.44 34.59
51-100 6.58 0.93 72.40
1-50 4.76 3.24 253.55
All 6.70 6.70 524.25
Panel C. All Retail Brokers
Turnover Share in Size Overall Turnover Share
Size Group Turnover ($Billions)
Group (%) (%)
Unaccounted (e.g. Pref. shares) 16.46 0.43 33.94
Outside 300 75.30 2.74 214.17
251-300 45.77 0.51 40.07
201-250 37.48 0.66 51.89
151-200 29.34 0.91 71.42
101-150 22.33 1.24 96.63
51-100 17.16 2.41 188.85
1-50 12.43 8.47 662.46
All 17.38 17.38 1359.44

37
 Table 4
Holding Period Trade Performance of Buys minus Sells Trades of Broker Channels
Every trading day, from 1995 to 2007, all trade are categorized by broker channels (full service, discount and institutional as defined in Section 2.3.) and buy and sell
trades in each stock on the ASX are netted out and placed into two groups depending on whether the position is a net buy or net sell. The table reports the trade value-
weighted holding period returns of buy – sell trades of the various broker channels at the end of day’s closing price and from trade to 1, 10 ,25, 140 and 254 days. Panel
A reports unadjusted returns and Panel B reports characteristic selectivity returns. Newey-West t-statistics are in parenthesis. **,* denotes statistical significance at the 1
and 5 percent levels respectively.
Panel A. Buys – Sells Holding Period Returns (%)
Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.06** -0.02* -0.03** 0.10** 0.62** 0.73** 0.80** 1.24**
(-5.95) (-2.50) (-12.42) (5.17) (10.08) (6.60) (3.48) (3.72)
Discount -0.51** -0.54** 0.03** -0.63** -0.62** -0.85** -1.94** -2.20**
(-33.94) (-33.41) (5.54) (-25.40) (-7.70) (-6.42) (-6.34) (-4.96)
All Retail -0.30** -0.29** -0.01** -0.24** 0.14* 0.10 -0.39 -0.30
(-24.92) (-23.25) (-3.50) (-12.11) (1.97) (0.83) (-1.40) (-0.77)
Institutional 0.30** 0.29** 0.01** 0.24** -0.14* -0.10 0.39 0.30
(24.93) (23.24) (3.64) (12.12) (-1.97) (-0.82) (1.40) (0.77)

Panel B. Buys – Sells Characteristic Selectivity Holding Period Returns (%)

Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.06** -0.02* -0.03** 0.16** 0.62** 0.68** 0.43* 0.85**
(-5.95) (-2.50) (-12.42) (12.42) (12.14) (7.68) (2.53) (3.60)
Discount -0.51** -0.54** 0.03** -0.09** -0.07 -0.33** -1.43** -1.67**
(-33.94) (-33.41) (5.54) (-6.76) (-1.22) (-3.26) (-6.49) (-5.15)
All Retail -0.30** -0.29** -0.01** 0.08** 0.43** 0.32** -0.55** -0.51
(-24.92) (-23.25) (-3.50) (6.21) (7.82) (3.20) (-2.74) (-1.83)
Institutional 0.30** 0.29** 0.01** -0.08** -0.43** -0.32** 0.55** 0.51
(24.93) (23.24) (3.64) (-6.21) (-7.82) (-3.20) (2.74) (1.83)

38
 Table 5
Holding Period Returns of Investor Clienteles’ Buy minus Sell Trades by Order Type
Every trading day, from 1995 to 2007, all trade are categorized by broker channels (full service, discount and institutional as defined in Section 2.3.) and whether they
are resulted from market orders or limit orders. Buy and sell trades in each stock on the ASX are netted out and placed into two groups depending on whether the
position is a net buy or net sell. The table reports the trade value-weighted holding period returns of buy – sell trades of the various broker channels at the end of day’s
closing price and from trade to 1, 10 ,25, 140 and 254 days. Panel A reports unadjusted returns and Panel B reports characteristic selectivity returns. Newey-West t-
statistics are in parenthesis. **,* denotes statistical significance at the 1 and 5 percent levels respectively.
Panel A. Market Order Buys – Sells Holding Period Returns (%)
Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.09** 1.19** -1.28** 0.12** 0.51** 0.71** 1.02** 1.64**
(-8.05) (57.42) (-78.69) (5.43) (8.08) (7.42) (4.97) (5.35)
Discount -0.54** 0.76** -1.30** -0.51** -0.47** -0.42** -0.44 -0.20
(-38.22) (39.22) (-62.07) (-21.41) (-6.54) (-3.77) (-1.72) (-0.50)
All Retail -0.29** 1.23** -1.52** -0.13** 0.19** 0.36** 0.53* 1.06**
(-25.15) (59.73) (-91.29) (-5.90) (2.82) (3.51) (2.38) (3.08)
Institutional 0.08** 1.31** -1.23** 0.18** 0.09 0.30** 1.47** 2.18**
(6.10) (77.64) (-79.29) (8.40) (1.63) (3.33) (7.13) (7.01)

Panel B. Limit Order Buys – Sells Holding Period Returns (%)

Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.01 -1.34** 1.32** 0.01 0.43** 0.35** -0.01 0.10
(-1.07) (-55.26) (74.67) (0.43) (6.94) (3.08) (-0.03) (0.32)
Discount -0.30** -1.48** 1.18** -0.51** -0.42** -0.76** -2.29** -2.84**
(-19.74) (-56.82) (76.30) (-19.13) (-5.36) (-6.00) (-7.94) (-7.38)
All Retail -0.16** -1.65** 1.49** -0.25** 0.07 -0.16 -1.14** -1.42**
(-11.81) (-68.05) (90.67) (-10.52) (1.08) (-1.31) (-4.47) (-4.04)
Institutional 0.25** -0.88** 1.13** 0.13** -0.11 -0.24* -0.88** -1.60**
(29.34) (-69.95) (88.93) (7.33) (-1.89) (-2.55) (-3.82) (-4.77)

39
Panel C. Market Order Buys - Sells Characteristic Selectivity Holding Period Returns (%)
Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.09** 1.19** -1.28** 0.17** 0.44** 0.53** 0.49** 1.02**
(-8.05) (57.42) (-78.69) (12.53) (8.75) (6.89) (3.02) (4.68)
Discount -0.54** 0.76** -1.30** 0.01 0.00 -0.05 -0.24 -0.19
(-38.22) (39.22) (-62.07) (0.87) (0.03) (-0.52) (-1.27) (-0.70)
All Retail -0.29** 1.23** -1.52** 0.13** 0.33** 0.36** 0.20 0.54*
(-25.15) (59.73) (-91.29) (9.04) (6.25) (4.42) (1.15) (2.36)
Institutional 0.08** 1.31** -1.23** 0.06** -0.08 0.10 1.01** 1.44**
(6.10) (77.64) (-79.29) (4.55) (-1.86) (1.32) (5.09) (4.97)

Panel D. Limit Order Buys – Sells Characteristic Selectivity Holding Period Returns (%)
Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to 140 Trade to 254
Broker T-M
day’s close close day days days days days
Full Service -0.01 -1.34** 1.32** 0.08** 0.51** 0.46** 0.00 0.13
(-1.07) (-55.26) (74.67) (5.14) (9.95) (5.20) (-0.01) (0.55)
Discount -0.30** -1.48** 1.18** -0.15** -0.01 -0.34** -1.62** -1.96**
(-19.74) (-56.82) (76.30) (-9.94) (-0.20) (-3.40) (-7.50) (-6.45)
All Retail -0.16** -1.65** 1.49** -0.03* 0.32** 0.10 -0.93** -1.11**
(-11.81) (-68.05) (90.67) (-2.17) (6.07) (1.11) (-4.94) (-4.19)
Institutional 0.25** -0.88** 1.13** -0.11** -0.29** -0.33** -0.46* -0.83**
(29.34) (-69.95) (88.93) (-8.90) (-6.25) (-4.49) (-2.49) (-3.31)

40
 Table 6
Trade Performance by Counterparty Pairs
Every trading day, from 1995 to 2007, all trades are categorized by, investor clienteles (discount, full service or institutional as defined in Section 2.3.). Trades are further
categorized by whether the counter party (counter broker) of the trade was a discount, full service or institutional broker. Buy and sell trades in each stock on the ASX and in
each group are netted out and placed into two groups depending on whether the position is a net buy or net sell. The table reports the trade value-weighted holding period
returns of buy – sell trades of the broker/counter broker to the end of day’s closing price, midpoint close and from midpoint trade to 1, 10 ,25, 140 and 254 days. Groups are
further broken down into whether the stock is one of the top 300 largest by lagged month-end market capitalization or not. Panel A reports statistics for the 1995-2005 period
and Panel B for the 1990-1994 period where there were no discount retail brokers. Newey-West t-statistics are in parenthesis. **,* denotes statistical significance at the 1 and
5 percent levels respectively.
Panel A. Buy minus Sell Holding Period Returns (%)
Trade to Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to Trade to
Stock Size Broker Counter Broker T-M
VWAP close close day days days 140 days 254 days
All Stocks Discnt Instit 0.08** -0.40** -0.61** 0.21 -0.44** -0.22** -0.37** -1.13** -1.53**
(10.48) (-32.77) (-2.59) (0.89) (-19.68) (-2.72) (-2.73) (-3.62) (-3.48)
All Stocks Full Serv. Discnt 0.15** 0.67** 0.73** -0.06* 0.96** 1.56** 1.88** 3.28** 3.39**
(14.76) (30.63) (19.24) (-2.10) (28.36) (18.58) (14.81) (11.18) (7.11)
All Stocks Full Serv. Instit 0.02* -0.22** -0.23** 0.01 -0.12** 0.32** 0.35** 0.10 0.42
(2.54) (-21.57) (-11.61) (0.37) (-6.26) (4.76) (2.97) (0.38) (1.18)

Largest 300 Discnt Instit 0.10** -0.37** -0.60** 0.23 -0.40** -0.11 -0.19 -0.82** -1.18**
(12.35) (-32.02) (-2.28) (0.87) (-17.91) (-1.30) (-1.44) (-2.62) (-2.60)
Largest 300 Full Serv. Discnt 0.00 0.38** 0.45** -0.06** 0.59** 1.08** 1.37** 2.48** 3.40**
(0.20) (22.23) (15.84) (-3.18) (19.70) (11.99) (9.97) (8.45) (8.43)
Largest 300 Full Serv. Instit 0.00 -0.24** -0.25** 0.02 -0.14** 0.34** 0.41** 0.33 0.62
(0.59) (-22.49) (-12.91) (0.99) (-7.75) (5.19) (3.65) (1.34) (1.68)

Outside 300 Discnt Instit 0.00 -0.72** -0.89** 0.16** -0.86** -1.30** -1.87** -5.38** -6.93**
(0.21) (-24.02) (-14.78) (3.20) (-14.75) (-6.71) (-6.37) (-7.38) (-7.77)
Outside 300 Full Serv. Discnt 0.38** 1.15** 1.28** -0.13 1.64** 2.36** 2.84** 4.69** 3.51**
(17.06) (27.80) (14.46) (-1.83) (27.85) (19.22) (14.42) (8.15) (3.36)
Outside 300 Full Serv. Instit 0.13** -0.08** -0.01 -0.07 0.09* 0.30** 0.18 -2.13** -2.73**
(11.75) (-3.19) (-0.13) (-1.67) (2.03) (2.10) (0.77) (-3.50) (-2.76)

41
Panel B. Buys – Sells Characteristic Selectivity Holding Period Returns (%)
Trade to Trade to Mid to mid Trade to 1 Trade to 10 Trade to 25 Trade to Trade to
Stock Size Broker Counter Broker T-M
VWAP close close day days days 140 days 254 days
All Stocks Discnt Instit 0.08** -0.40** -0.61** 0.21 0.00 0.20** 0.03 -0.86** -1.04**
(10.48) (-32.77) (-2.59) (0.89) (-0.27) (3.34) (0.28) (-3.69) (-3.09)
All Stocks Full Serv. Discnt 0.15** 0.67** 0.73** -0.06* 0.27** 0.76** 1.16** 2.35** 2.66**
(14.76) (30.63) (19.24) (-2.10) (14.30) (11.74) (11.10) (10.83) (8.48)
All Stocks Full Serv. Instit 0.02* -0.22** -0.23** 0.01 0.12** 0.50** 0.46** -0.17 0.06
(2.54) (-21.57) (-11.61) (0.37) (8.94) (9.37) (4.86) (-0.89) (0.25)

Largest 300 Discnt Instit 0.10** -0.37** -0.60** 0.23 0.00 0.24** 0.07 -0.79** -0.90**
(12.35) (-32.02) (-2.28) (0.87) (-0.20) (3.87) (0.66) (-3.30) (-2.61)
Largest 300 Full Serv. Discnt 0.00 0.38** 0.45** -0.06** 0.18** 0.53** 0.84** 1.72** 2.32**
(0.20) (22.23) (15.84) (-3.18) (10.72) (7.40) (7.45) (6.63) (6.37)
Largest 300 Full Serv. Instit 0.00 -0.24** -0.25** 0.02 0.10** 0.51** 0.47** -0.16 0.11
(0.59) (-22.49) (-12.91) (0.99) (8.64) (9.41) (4.80) (-0.85) (0.44)

Outside 300 Discnt Instit 0.00 -0.72** -0.89** 0.16** -0.11* -0.35 -0.64* -2.33** -4.32**
(0.21) (-24.02) (-14.78) (3.20) (-2.51) (-1.89) (-2.31) (-4.39) (-5.29)
Outside 300 Full Serv. Discnt 0.38** 1.15** 1.28** -0.13 0.44** 1.18** 1.76** 3.13** 2.71**
(17.06) (27.80) (14.46) (-1.83) (11.25) (10.67) (10.01) (8.40) (5.03)
Outside 300 Full Serv. Instit 0.13** -0.08** -0.01 -0.07 0.19** 0.49** 0.56** -0.16 -0.67
(11.75) (-3.19) (-0.13) (-1.67) (5.79) (3.57) (2.78) (-0.38) (-0.98)

42
 Table 7
Determinants of Risk Adjusted Profits and Losses
The table reports OLS coefficients for the following model:
AProfit i,p,t  α 0  β1 Anonymity  β 2 PreAnn i, t  β 3 Ann i, t  β 4 Market_Volt  β 5 Logcapi, t 1
 β 6 Aord52Weeki, t 1  β 7 StockVoli, t 1  β 8 WeeklyTurnoveri, t 1  β 9 Absmom6week i, t 1
 β10 Absmom12month i, t 1  β11Stock52Week i, t 1  β12 Buy i, t  ε i,p,t
Details of the variables are in Section 3.5. Newey-West t-statistics are in parenthesis. **,* denotes statistical
significance at the 1 or 5 percent levels respectively.
Order Trade to Trade to 1 Trade to Trade to Trade to Trade to
Broker Type Parameter Close day 10 days 25 days 140 days 254 days

Full Limit -3.16 48.27 -383.96** -420.27* -5870.87** -6564.07**

Anonymity
Serv.
(-0.06) (0.61) (-3.10) (-2.58) (-12.16) (-11.28)
PreAnn 220.19* -37.26 326.96 1275.83** 1725.87 -578.28
(1.97) (-0.15) (0.70) (2.58) (1.27) (-0.30)
Ann 22.03 70.23 -222.15 -571.29 1045.35 -1535.38
(0.16) (0.30) (-0.64) (-1.13) (0.88) (-0.85)
Market Anonymity 35.91 18.32 -7.72 -74.52 -307.03 443.49*
(1.28) (0.51) (-0.16) (-0.53) (-1.84) (2.26)
PreAnn -99.58* 15.30 -100.74 -421.83 -157.91 111.73
(-2.01) (0.16) (-0.54) (-1.92) (-0.27) (0.19)
Ann 202.73** 245.68** 413.69** -50.92 108.56 -439.99
(4.02) (3.19) (2.66) (-0.23) (0.21) (-0.98)
Discount Limit Anonymity -58.12* -33.98 -82.03 -107.37 -799.81** -775.44**
(-2.56) (-0.86) (-1.21) (-1.18) (-3.40) (-2.80)
-693.87** - - -995.37** -1765.02* -3174.00**
PreAnn
1211.10** 1520.88**
(-8.22) (-8.38) (-6.15) (-3.55) (-2.00) (-3.72)
Ann -511.59** -571.56** -351.31 -365.42 -215.65 -979.08
(-8.19) (-5.71) (-1.92) (-1.54) (-0.34) (-1.62)
Market Anonymity -11.55** -26.02** -26.33 25.75 52.80 37.04
(-5.51) (-6.04) (-1.82) (1.21) (1.49) (1.08)
PreAnn -6.40 14.21 -29.55 -206.32 -110.56 -18.83
(-1.13) (0.41) (-0.30) (-1.10) (-1.12) (-0.25)
Ann -0.33 -3.13 74.03* 47.77 -100.85 -189.01
(-0.06) (-0.27) (2.31) (0.93) (-0.92) (-1.92)
Instit Limit Anonymity 103.41 95.19 12.12 779.59 -458.14 -41.63
(0.90) (1.08) (0.18) (1.26) (-1.89) (-0.17)
PreAnn 27.80 -296.94* -805.70** 227.42 1082.28 192.58
(0.33) (-2.03) (-2.66) (0.32) (1.36) (0.24)
Ann -12.41 -98.36 -338.13 -395.97 -59.03 -791.03
(-0.18) (-1.23) (-1.60) (-0.74) (-0.10) (-1.19)
Market Anonymity 5.36 -41.69 604.35** 529.04* 8903.04** 8771.08**
(0.07) (-0.37) (3.48) (2.45) (14.17) (11.27)
PreAnn 34.46 650.42 493.46 -1032.80 -2177.25 2500.26
(0.24) (1.88) (0.76) (-1.58) (-1.18) (0.93)
Ann 221.89 207.76 488.90 1136.88 -760.28 3505.15
(1.16) (0.65) (1.07) (1.70) (-0.49) (1.44)

43
Figure 1. Market and Limit Order Trade Cumulative Returns of Full Service and
Discount Brokers

44
Figure 2 Market Order Trades' Returns of Full Service and Discount Brokers

Figure 2a Full Service Broker Market Order Trades' Returns Figure 2b Full Service Broker Market Order Trades' t‐statistics

2 15

10
1.5
10:00 10:00
11:00 5 11:00
1
12:00 12:00
0
13:00 13:00
0.5 Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to 
14:00 ‐5 day's close day days days 140 days 254 days 14:00
15:00 15:00
0
‐10
Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to 
day's close day days days 140 days 254 days
‐0.5 ‐15

Figure 2c Discount Broker Market Order Trades' Returns Figure 2d Discount Broker Market Order Trades' t‐statistics

0 0
Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to  Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to 
‐0.1 day's close day days days 140 days 254 days ‐5 day's close day days days 140 days 254 days

10:00 10:00
‐0.2 ‐10
11:00 11:00
‐0.3 ‐15 12:00
12:00
13:00 ‐20 13:00
‐0.4
14:00 14:00
‐0.5 ‐25
15:00 15:00

‐0.6 ‐30

‐0.7 ‐35

45
   
Figure 3 Limit Order Trades' Returns of Full Service and Discount Brokers

Figure 3a Full Service Broker Limit Order Trades' Returns Figure 3b Full Service Broker Limit Order Trades' t‐statistics

0.8 12

10
0.6
8
10:00 10:00
0.4
6 11:00
11:00
0.2 12:00 4 12:00

13:00 2 13:00
0
Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to  14:00 0 14:00
‐0.2 day's close day days days 140 days 254 days Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to  15:00
15:00 ‐2
day's close day days days 140 days 254 days
‐0.4 ‐4

‐0.6 ‐6

Figure 3c Discount Broker Limit Order Trades' Returns Figure 3d Discount Broker Limit Order Trades' t‐statistics

0.5 5

0 0
Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to  Trade to  Trade to 1  Trade to 10 Trade to 25  Trade to  Trade to 
‐0.5 day's close day days days 140 days 254 days 10:00 10:00
‐5 day's close day days days 140 days 254 days
‐1 11:00 11:00
12:00 ‐10 12:00
‐1.5
13:00 ‐15 13:00
‐2 14:00 14:00
‐20
‐2.5 15:00 15:00

‐3 ‐25

‐3.5 ‐30
   
                         
             
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