How much exactly does it cost to trade a block of stock? "Nobody quite agrees on a standard measure of trading costs," one expert said. "Several measures are used."
Costs head south if the trade beats the intra-day spread, but head back north if the trade results in negative market impact three days after it has crossed.
Soft-dollar rebates reduce costs, and some fees increase costs.
How to measure trading costs may even split the experts.
But more than 90 percent of executives at major investment firms do agree on one thing trading-cost analysis will be more important as a money-management tool over the next five years.
Measuring
According to a survey of 500 institutions by New York-based institutional brokerage Midwood Securities, these executives said trading-cost analysis is fast becoming a widely-accepted tool for measuring trading performance.
"One of the key factors driving it is the growing need for best execution," said Midwood President Terry March.
Among institutions that currently purchase or have their own systems, a large number use trading-cost analysis as a decision-making tool, according to the survey.
Another 29 percent use it for selecting broker dealers; 50 percent use it considering a switch to other broker dealers; and 32 percent use it when deciding how frequently to use them.
Gauge
Moreover, most of the institutions use trading-cost analysis to gauge the performance of staffers; 88 percent use the analysis to measure the performance of the trading desk; and 59 percent use it to chart their portfolio managers.
Almost 75 percent of the respondents prefer a system which measures both the quality of execution and the subsequent market impact of each trade.
One quarter use a system that focuses exclusively on the quality of execution, while 75 percent evaluate trading execution on both a trade-by-trade basis over a period of time.
Outside the U.S.
Half of the respondents stressed the importance of a system that analyzes trading costs in markets outside the U.S.
Sixty-two percent of the respondents reported that they currently use trading-cost analysis. Of those, 76 percent purchase a system, 18 percent use their own system and six percent use both.
Midwood is a nine-year-old New York Stock Exchange-member firm founded by March, a former senior financial officer at New York-based Dillon, Read & Co. (now part of SBC Warburg Dillon Read) and Sanford C. Bernstein. staff reports
