Single dealer platforms (SDPs) are alternative sources of liquidity for US equity execution algorithms. They also allow broker-dealers to significantly reduce their explicit trading costs, and as a result, most brokers use them within their execution algorithms. But the negative consequences of using SDPs are not well understood. In this paper, we describe the issues in detail and explain what traders can do about them.

We review the implications of taking liquidity from an SDP as opposed to an exchange or ATS. We also dispel some of the common marketing misconceptions we most often hear about using SDPs, including that reacting to IOIs eliminates information leakage, that markout analysis shows there’s no impact of trading with SDPs on performance, and that brokers’ segmentation of order flow has no additional impact on performance.

As always, our foremost goal is providing information so every institutional investor can make the most educated decisions around execution. Access the paper at the link below and, as always, we’re happy to answer any questions you may have. Email us at research@bestexresearch.com.