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Broker Leaks: How to Generate Performance

Posted by
Swiss Finance Institute
Friday, September 15, 2017 - 11:00

Being a major client of a central broker can improve your performance—and you don’t even need to deploy superior investment skills.

SFI Professor Francesco Franzoni (University of Lugano), Carlo Sommavilla, SFI PhD, and their co-authors find evidence «that an important source of alpha for fund managers is the access to better connections rather than superior skill»: central brokers seem to share confidential information about one client’s trading strategy with the best of their other clients, which enables the latter to realize extra returns by simple imitation. And indeed, such imitation effects do not occur when a broker is executing the trades of affiliated clients.

The analysis was conducted using several years of trade-level data and excluding all other possible effects, such as manager, stock, or other broker characteristics. More details can be found in Franzoni and Sommavilla's working paper: «The Relevance of Broker Networks for Information Diffusion in the Stock Market».

These outcomes have also been discussed in several prestigious international media outlets:

Bloomberg—read here and here
Institutional Investor—read here
Wall Street Journal—read here (paywall)

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