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Discussion in 'Trading' started by FishSauce, Jun 3, 2003.

1. ### FishSauce

Hi,

I need some help regarding commission structure for pairs trading.

As some of you might remember, I was the one inquiring about setting up a newsletter.

I just "manuffactured" a new pairs trading system for daytrading, but am running into roadblock regarding its feasibility, any help would be much appreciated:

4 pairs --> 8 total trades, roundtrip
close-to-close

The average Rate-of-Return per day is 0.79%.

My question is will commission eat up by profits to the point where it's no longer feasible to implement??? Moreover, if it COULD be profitable, can you give me a ballpark notional value ?

i.e. The necessary startup capital that is large enough to absorb the impact of the Commission.

---Fish

2. ### mschey

You will need to execute 16 transactions. Not taking into account slippage which could be anywhere from a 2 or 3 cents to as much as 25 cents or more, per pair executed. You are probably looking at about \$20.00 per 100 shares. If you do larger size, you can significantly reduce these costs, but for a newbie, that's probably what you should expect to pay. As for start up capital, you will need 5 or 6 thousand per 100 share leg in each pair.

3. ### FishSauce

I am looking at IB's, and this is how I figure..

USD 0.01/Share for 500 shares

Assume average stock price = \$18

500*0.01 =\$5

\$5 * 16 trades = \$80

500 shares * 16 trades * average price (\$18) = \$144,000

Thus commission = \$80/\$144,000

= 0.056%

I am missing smthg...my math cant be right ...

4. ### FishSauce

So its basically 20cents per share. But isnt IB's commission rate at 1 cent per share up to 500 shares?

At 20 cents a share, assuming an average price of \$18 a share. Commission would be 1.1% ... man ..that's a b*tch.
I think my math is wrong somewhere...

5. ### Bob111

one of ways to figure this out-try it.
tell you-this is one of the reasons, why i give up on pairs-very limited profit, unlimited risk. and commissions. it does make very big sense, if you trade same pairs and price drop with market.
i trade semis a lot and when on market bottom commissions eat big chunk of my profits, because all of them somewhere around 10-15 bucks. profits still same, but commissions rise very quick. try to pick expensive stocks like > \$30
don't pick \$10 crap. IB is good for small lot's. if you trade pairs in 500-2000 or more shares-man...you will be surprised by end of the month, how much you did pay for commissions.

Good Luck!

6. ### FishSauce

Yeah, Pair Trading is a b*tch when it comes to commission.