Equity trading by institutional investors:: To cross or not to cross?

The proliferation of market places and trading methods is a striking feature of current equity markets. A stated goal of all the new trading arrangements is to reduce transactions costs. We investigate costs in one new market place, the crossing network. A crossing network is a satellite trading place; it uses prices derived from a primary market, and merely matches on quantity. Using a data sample from a large institutional investor, we provide evidence that low measured costs in crossing networks are offset by substantial costs of trading failures. The costs of trading failures due to adverse selection in the network's order execution, are not reflected in standard measures of transactions costs. (c) 2006 Elsevier B.V. All rights reserved.