Assessing Execution Quality in Illiquid Securities

Summary

The document questions whether standard execution quality statistics adequately assess illiquid securities, especially over-the-counter instruments. The response says meaningful analysis requires intraday bid, ask, and trading volume data. Wide spreads alone are not enough to judge a fill: short-term market direction can strongly affect whether an execution occurs near one side of the spread or the other.

For very illiquid securities, execution quality may also depend on a broker’s relationships and ability to source or move volume, making it difficult to evaluate one security through a broad market-level measure. The answer suggests that data limitations and the role of broker-specific access complicate comparisons. It does not propose a formal metric, benchmark, or statistical procedure, and its comments are qualitative rather than supported by empirical results.

Key ideas

• Intraday bid, ask, and volume data are needed to assess executions in illiquid securities.
• A wide spread alone does not determine whether a fill was good because market movement affects execution prices.
• Broker relationships and capacity to source volume can dominate execution outcomes in very illiquid markets.
• The document identifies measurement challenges but does not specify a quantitative execution quality metric.

Tags

# Execution quality for illiquid securities


# Execution quality for illiquid securities












The `SEC's` execution quality statistics measurements (`Rule 605`) arguably does a poor job at measuring the execution quality of illiquid securities. It also does not cover over the counter securities.

What would be a good method to utilize for measuring execution quality for such securities?

## Answer by Brumder (score 2)

https://quant.stackexchange.com/a/21061

You would need intra-day bid-ask and volume data, otherwise this would be difficult to analyze. Even with large spreads, your trade can execute on either end of the spectrum just based off of how the market is trending that second as a whole for most low-volume securities.

For most truly illiquid securities, execution is more dependent on the broker's relationships and ability to move volume than it is the market, making it hard to classify execution for a single product as a whole. Not addressing OTC securities is really not leaving you with a lot of assets to investigate anyway.

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