The centerpiece of this paper is a comprehensive analysis of all of the trading by a large US pension fund in 1991. The first version was published in the Summer 1995 issue of the Journal of Investing and later incorporated in the AIMR’s CFA reading. This updated version, requested by the AIMR, reflects the technological and market structure changes of the last ten years, and adds a new empirical analysis of all the 2001 trading by a $7 billion US equity manager.
Trading technology has changed in many ways, yet many of the same characteristics of institutional trading are seen just as strongly as they were before. The attention given to large difficult orders still shows in lower than expected trading costs. Small “no-brainer” orders still represent the largest component of overall trading costs. These are precisely the type of costs that modern electronic trading systems are designed to reduce.
The idea that trading costs were a substantial drag on performance was a relatively novel in 1991. Today, it is a central concern for many managers, including those profiled here
