Best Brokers Beat Bank Dark Pools by Trading Only for Clients

The best stock brokers last year only traded for their clients, according to research group Abel Noser Solutions.

Liquidnet Holdings Inc. and Investment Technology Group Inc. topped the list, which tracked the amount equity prices moved between the time a customer sent an order and when it was completed. Liquidnet and ITG are agency brokers, which means they don’t buy and sell for themselves. The two were the only large firms to save clients money, Abel Noser found.

U.S. lawmakers and New York Attorney General Eric Schneiderman have criticized brokers this year for allegedly prioritizing their own needs over those of their clients. Senator Carl Levin, a Michigan Democrat, called on regulators to ban two practices he said skew incentives for brokers. Schneiderman sued Barclays Plc, saying the bank misled customers and hoarded trades instead of routing them to other platforms.

Most large brokers such as Barclays run their own U.S. stock trading networks known as dark pools, and this may hurt them in the rankings, said Ted Morgan, the chief operating officer of Abel Noser Solutions.

“Most dark pools have insufficient participation to deliver the service that they promised,” Morgan said in a phone interview. Large brokers “have a lot of trouble beating the benchmark, except for Liquidnet and ITG, two non-traditional brokers that beat it quite handily,” he said. Both firms operate dark pools.

Banks Drop

The rankings, which Abel Noser has maintained for five years, were once dominated by banks that trade for themselves as well as others. In 2010, Goldman Sachs Group Inc. took first place, and in 2011 Deutsche Bank AG topped the list. Now, for the third year running, Liquidnet is in first, and two other agency brokers, ITG and Nomura Holdings Inc.’s Instinet, are in the top 10. Goldman Sachs fell to sixth place and Deutsche Bank to 10th.

Brokers that specialize in trading large blocks of stock are also benefiting from a calm market, according to Jamie Selway, managing director and head of electronic brokerage and sales at New York-based ITG.

The average size of a trade on Liquidnet’s biggest platform is 43,611 shares, while it’s 302 shares on ITG’s Posit, according to data compiled by the Financial Industry Regulatory Authority for the week of June 30. That compares with an average of 195 shares on the 42 alternative trading systems -- including dark pools -- tracked by the regulator. The analysis only includes stocks in the Standard & Poor’s 500 Index, Russell 1000 Index and some exchange-traded products.

More Appetite

“Low volatility definitely increases the appetite on the part of the buy-side to cross,” Selway said, referring to large traders. “If you trade a big block of stock in a volatile market, it’s quite possible for you to look pretty poor immediately -- bit of a coin flip.”

The Chicago Board Options Exchange Volatility Index, a measure of expected price swings in the stock market, slumped to a seven-year low of 10.32 on July 3.

Liquidnet can get better prices because it’s a closed pool that lets in only members, according to Brennan Warble, the New York-based company’s head of U.S. equities.

“You know that when you execute you’re executing with another like-minded institution and providing liquidity to each other,” Warble said by phone.

Regulatory pressure has also hurt the big banks, said James Angel, a professor at Georgetown University in Washington.

“Equity trading has gotten extremely cutthroat -- it’s commoditized,” he said during a phone interview. “The regulatory overhead that banks have compared with non-banks, -- i.e., the b-d’s and hedge funds -- are going to put a damper on their operations,” said Angel, referring to broker-dealers.

Before it's here, it's on the Bloomberg Terminal.