That is the half that turns a guidelines into an precise discovering. Evaluating a 3,000-share order towards a 100-share order and concluding that internalization failed as a result of the larger order price extra tells you nothing helpful. Measurement alone is dear to execute.
The comparability that issues is a 3,000-share order towards different 3,000-share orders of the identical sort, in related names, beneath related liquidity and volatility, cut up by execution or routing path the place that path can really be recognized. These comparisons are most informative when they’re matched throughout the similar image, order sort, liquidity, and volatility bucket, and time-of-day window.
When you do this, lots of the variation attributable to order problem could be managed for, and the routing path turns into a extra believable contributor to no matter hole stays.
An illustrative case makes this concrete. Let’s say a supervisor’s 100-share orders in liquid large-caps are available round 1.5 foundation factors of efficient unfold, whereas 2,000-share orders in the identical names run nearer to 7 foundation factors. That hole alone proves nothing — bigger orders are simply tougher to fill.
The actual query is what comparable 2,000-share orders of the identical sort appear to be when routed externally beneath related circumstances. If these land round 6.8 foundation factors, internalization isn’t clearly the offender; problem explains most of it. If this 2,000-share order lands round 3.5 foundation factors as an alternative, the routing mannequin for that measurement and liquidity bucket deserves a better look.
