The determinants of average trade size

A central, but largely untested, assumption in the modern literature on financial markets is that investors trade strategically, taking account of the effect of their trades on prices. We use a simultaneous equations approach motivated by theoretical analysis to test this assumption empirically. The results point to a strong and negative cross-sectional relation between the average trade size and estimated fixed and variable costs of transacting per share, consistent with strategic trading. We also find that average trade size is positively related to return volatility, the standard deviation of trading volume, and the proportion of shares held by institutional investors.