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Size matters: A better
than average fill metric
Chris Sparrow, head of research at LiquidMetrix, examines how firms
can adopt better metrics to measure broker performance.
W
ith the current focus in
equity markets on transpar-
ency, brokers are being measured
by many different metrics to assess
their performance, including
spread capture and their ability to
interact effectively with both lit
and dark order books. One of the
metrics being used to assess how
brokers interact with the market
is the average trade size achieved
by the broker. This metric is used
to proxy liquidity capture and is
simple to calculate. The problem
is that is also a simplistic measure
that doesn’t really tell us what we
want to know.
When it comes to liquidity cap-
ture, there are three dimensions to
consider. What can be captured by
removing liquidity from an order
book, what can be captured from
sitting passively in a lit order book
and what can be sourced from dark
pools.
Let’s first consider how to
measure the ability of a broker to
successfully capture passive liquid-
ity that is sitting in one or more
lit order books. The average trade
size will depend on two things:
the size of the active order sent by
30 // TheTrade // Spring 2019
the broker to access the passive
liquidity and the structure of the
orders that are sitting passively in
the order book.
An example can help to illus-
trate this: consider a broker that
would like to immediately execute
1,000 shares. The broker sends a
marketable order for 1,000 shares
to an order book displaying 1,000
shares. At one extreme, the order
book could consist of a single pas-
sive order for 1,000 shares while at
the other extreme, the order book
could consist of 10 passive orders
of 100 shares each. In the first case,
the broker will execute one trade
of 1,000 shares and have an average
trade size of 1,000 shares.
In the second case, the broker
will execute 10 trades for 100
shares each resulting in an average
trade size of 100 shares. In both
cases the broker captured 1,000
shares of liquidity but the resulting
average size depends on the struc-
ture of the order book at the time
the broker sends their order. The
broker has no control over the or-
der book, yet if we use average fill
size as our proxy for performance,
we would come to very different
Chris Sparrow,
head of research, LiquidMetrix
conclusions about how skilled the
broker is at liquidity capture. If
we had a better metric, we should
see no difference between these