No investor wants to lose money. Some may want to preserve capital; others may seek capital appreciation. Neither wants to put capital at risk by paying high prices or unnecessary costs. Yet institutional investors overpay, transaction by transaction, and they don’t know it.

The magnitude of trading overpayments may be as high as 2% or more annually of the typical institution’s portfolio. To attack this murky area, investors must delve deeper into their trading partners’ execution practices. While technology has made transactions faster, tripled execution capacity and enabled strategies of unimaginable complexity, computing power has not yet dispelled the fog around execution.

This disconnect reflects the fact that investors and their trading partners are pursuing different objectives. Investors want capital growth; the sell-side houses that trade for them seek transaction-generated profits. No wonder, then, investors are flooded with reams of material that encourages more activity, not claims about how well each trade was executed. A massive information gap separates investors and their trading partners. Investors holding posthumous market summaries are trading against broker dealers who are fed millisecond details. And if a comparison between investor returns and bank trading profits is indicative, investors are losing.

The two largest US public pension funds reported losing almost $100 billion in the full year ended 30th June while reported trading profits at the two largest US banks approached $20 billion. New regulations that amend best execution standards have further aggravated investors’ information woes. Investors are now required to obtain not only the best price for a transaction but also to consider quality and reliability factors. Unfortunately, regulators did not require disclosure of the requisite transaction execution information needed by investors to meet these new standards, nor address a backlog of other information deficiencies.

This endemic information disadvantage systematically erodes not only $12 trillion of assets subject to best execution standards, but it puts large amounts of capital worldwide at risk every day.