That is the half that turns a guidelines into an precise discovering. Evaluating a 3,000-share order in opposition to a 100-share order and concluding that internalization failed as a result of the larger order value extra tells you nothing helpful. Measurement alone is pricey to execute.
The comparability that issues is a 3,000-share order in opposition to different 3,000-share orders of the identical sort, in comparable names, beneath comparable liquidity and volatility, break up by execution or routing path the place that path can truly be recognized. These comparisons are most informative when they’re matched throughout the identical image, order sort, liquidity, and volatility bucket, and time-of-day window.
When you do this, lots of the variation brought on by order problem will 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 true query is what comparable 2,000-share orders of the identical sort seem like when routed externally beneath comparable situations. If these land round 6.8 foundation factors, internalization isn’t clearly the perpetrator; 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.
