A Hint About Redefining Transaction Cost Analysis: It’s Not About Cost

June 1, 2010
Tom Steinert-Threlkeld

When electronics started to win out in the execution of trades, the ability of digits to store information on orders on the fly made it possible to figure out both the explicit costs of a transaction – commissions, markups, etc. – but the implicit ones – like opportunity costs or the movement of a stock price from the time of the investment decision to the expiration or completion of the order.

But the practice of what has come to be called transaction cost analysis is no longer about the cost. It’s about performance.

Now, there is a “feedback loop” because of transaction analysis, says Tim Mahoney, the chief executive of BIDS Trading, that did not exist eight years ago, when the software that embodies the practice first started emerging.

In effect, the capturing of implicit and explicit costs, of all types, is a digital recorder. It allows traders to look at their golf swing. Again and again and again. Until they figure out what’s going wrong and fix it, Mahoney said Wednesday, after the conclusion of a gathering of the Capital Markets Consortium at Bayards in the financial district of New York.