Sell-Side Electronic Trading:
Industry Reacts to New Generation of Hackers | A New Way to Attack Market Data Costs | The Hidden Cost of Trading | In Fixed Income, FIX Is a Post-trade Solution | Algorithms Multiply to Match Trading Strategies |
The Hidden Cost of Trading
November 21, 2006
Two of the obvious components of trading cost--commissions and market impact--combined account for only 33 percent of the costs in Nasdaq Stock Market stocks, according to an October report from Celent, "Execution Quality in the Nasdaq Market." Delayed and missed trades, by contrast, account for 67 percent.
In the report, Octavio Marenzi, CEO of the Boston-based research firm, analyzed execution speeds and prices obtained at various market makers and electronic communications networks (ECNs) to determine which market centers provide the lowest overall transaction cost. He also observed that best execution is not an easily definable term, because execution quality can vary by not just the trading venue, but the size of the order and the liquidity of an individual stock.
In general, market makers, which provide their own capital to facilitate trades, tend to provide better price improvement than ECNs, particularly on small orders of highly liquid stocks. ECNs tended to offer faster execution than the market makers, but as order size increases and a stock's liquidity declines, market makers' advantage in price improvement narrows. The report did not go into the reason for this phenomenon, though it did note that no market center offers "the best execution quality on a consistent basis across a broad spectrum of issues, order sizes or order types."
