types of transaction costs

Discussion in 'Automated Trading' started by travis, May 9, 2009.

What is the biggest transaction cost in your automated trading?

  1. commission

    0 vote(s)
  2. spread

    3 vote(s)
  3. slippage

    3 vote(s)
  4. market impact

    0 vote(s)
  1. travis


    Do not answer the poll if you do not use an automated trading system or if you feel, for any reason, that you cannot answer correctly.


    The major categories of transaction costs are the following:

    1. commission
    2. bid-ask spread
    3. slippage (delay in the execution usually gives you a worse execution price)
    4. market impact (how your order will affect your own execution price)

    Whereas all 4 types of transaction costs in the future will be of concern to me, right now all I have to worry about, given my capital and my systems, is 1 and 2, (commission and spread). Besides, given the low frequency and average gain of my trades I almost don't have to worry about any costs at all.

    Any comments on the categories and how these costs affect your own automated trading?

    For example, I use MARKET orders. That's how little I am worried about 2, 3 and 4 (spread, slippage and market impact).
  2. travis,

    I use cool-trade and interactive brokers. I do no manual trades. IB uses a /per trade' pricing strategy, so I trade in higher priced stocks. I set a floor of $30, and a ceiling of $70.

    As CT trades in 100 share multiples, a 100 share trade always ends up costing me $1.

    You asked how this affects my trading. Well, as the lowest trade I do is $3000, that $1 commission is quite manageable.

    Was this what you wanted?

  3. travis


    Yep. That's what I wanted. Thank you for being the first to post on this thread.

    As far as my trading, I am going to vote for "spread" as the highest cost, because of the following reasons.

    I have no "market impact" (I only buy 1 contract).

    "Slippage" is not an issue for my systems because of how they work (mostly time based entries and exits, and if they get executed a few seconds later price will still be the same).

    Each "round trip" (opening and closing a position, a "completed" trade) on the ES for example (which is representative of the others) costs me about 4 dollars in commissions and 12.5 dollars in spread (because the ES has a 1-tick spread). Now, the commissions are not higher for the other futures, but the spread sometimes is, so the case is even stronger for voting "spread".

    Spread however is an inevitable cost, unless - by waiting for your desired price to be filled - you want to risk an "opportunity cost" , the fifth type of transaction costs identified by E.P.Chan in his "Quantitative Trading" book, which means taking the risk of missing some trades. Yet I didn't list it in my poll, because a system that accepts missing as many as half of the trades is not even a "system" as we mean it. Plus, if its signals are good, it doesn't make any sense to miss a large part of the trades in order to get a better execution price that will merely eliminate the spread cost of usually 1 tick. (In my opinion, and as far as I know).
  4. travis