Self-described 'deep' liquidity provider Liquidnet has released a new study that analyses the volatility associated with institutional 'block trades' executed by 34 institutional broker trading desks and dark pools.
'Dark pools' allow institutional investors to conduct large trades with counterparties without fear of the share price moving dramatically in the lead-up to the trade.
But while Liquidnet uses an online platform to match institutional buyers with sellers, other brokers in dark pools will make phone calls to potential counterparties – creating what Liquidnet refers to as "information leakage".
Liquidnet's study of the Australian market found the highest recorded volatility in a stock traded by a broker was 65.8 per cent, compared to less than 8.0 per cent for Liquidnet.
The study was made possible by a decision by ASIC to make more information about dark pools available in July 2014, said Liquidnet head of Australia Tristan Baldwin.
Liquidnet founder and chief executive Seth Merrin said it is incumbent on buy-side traders to take the data provided by ASIC and use it to evaluate different trading venues and their differing performance levels.
"Venue analysis is becoming a huge thing in the US and now in Europe," Mr Merrin said.
"You want to choose your suppliers. No longer can you just give out random orders and assume that everything is going to be the same, or all venues are equal or all brokers execute in the same way," he said.
With the amount of money going into the superannuation sector, it is vital for funds to understand the performance of their block trades, Mr Merrin said.
"If you’re placing it in the wrong venues, the more money it’s going to cost the ultimate end-investors. As the [superannuation] sector continues to grow – and it’s going to get larger – these things start adding up," he said.
Every other industry evaluates the performance of its vendors, said Mr Merrin – and superannuation funds and their fund managers should be no different when it comes to the performance of their brokers.
"Because there’s so much money in [superannuation] it’s actually critical and we applaud ASIC for making this data available," he said.
