Even if the very real contribution to the total "cost" of a transaction from poor performance could be quantified, it will always be a fuzzy number[.]
Just a quick FYI, not intended to address the previous discussion but worthy of tangiental mention.
There are a number of consulting firms out there that specialize in exactly this: the quantitative analysis of transaction fees incurred in the course of executing large orders. They gather data by getting large institutions - for whom the numbers are extremely meaningful - to allow them to farm their data, sit with them, and generally hang over their shoulders, year after year, trade after trade, to come up with the varying trends in costs as they affect large trades over time.
Some background, first. There are the four different measures of "cost" in a transaction. The first two are called "brokerage costs:"
1. Commissions, mark-ups, and fees
2. Market impact (aka "slippage")
...while the second two constitute "implementation costs:"
3. Delay (in sending order to brokers/market centers)
4. Missed trades (portions of trades not executed or cancelled before executed)
These measures are tabulated in total dollar, per share, basis point, and percentage terms across hundreds or thousands of trades of similar share size, issue market capitalization, and market conditions during execution.
The latest numbers I have on these (scribbled here in a notebook from some conference call or meeting of long forgotten origin, LOL) are at most two years old, and indicate the following values for a 250,000 share order of a $45/share stock. That's an $11,250,000 principal transaction.
Large cap stock; 250,000 shares; $45/share
Avg. Commission = .12% ($.05/share)
Avg. Impact = .20% ($.09/share)
Avg. total brokerage cost = .32% ($.14/share)
Or...in per share terms, the cost of the order is now $45.14/share, or, on a principal basis, $11,285,000. An increase of $35,000.
Avg. Delay = .53% ($.24/share)
Avg. "Missed" = .16% ($.07/share)
Resulting in a total average increase in order costs of 1.01%, or making a $45/share order $45.45/share. The principal increase amounts to a total cost of $11,363,625 (+$113,625).
Small cap stock; 250,000 shares; $45/share
Avg. Commission = .22% ($.04/share)
Avg. Impact = .33% ($.06/share)
Avg. total brokerage cost = .55% ($.10/share)
Or...in per share terms, the cost of the order is now $45.10/share, or, on a principal basis, $11,261,250. An increase of $11,250.
Avg. Delay = 1.72% ($.31/share)
Avg. "Missed" = 2.22% ($.40/share)
Resulting in a total average increase in order costs of 4.49%, which makes this $45/share order $45.81 before it's done. An extra 13/16, if you will. The principal outlay amounts to a total cost of $11,755,125 upon execution, an increase of over half a million dollars from the intended capital outlay for the trade.
***
Now, a few things need to be noted.
First, that the costs imply two things: that the final transaction cost which the firm/fund received was higher than expected, and/or that (since most of such institutions trade on the long side) the spread between the purchase and sale price targets had narrowed as a result of the execution costs.
Second, that it is worthy of note that in both cases, the commissions/fees/markups were the smallest part of the transaction cost. This is nearly always the case on the institutional side; on the retail side, of course, the brokerage costs are the major, and at times the only, costs above and beyond the principal cost.
And third, that yes - for a huge financial institution, amounts on the order of $11K, $100K, even $500K don't seem excessive. But if memory serves, the above costs essentially require that for funds with over $1 billion in AUM, they essentially need to make 2%, or 200 basis points, just to break even.
Also, funds that benchmark their performance to indeces (S&P, Russell, etc.) have to watch their costs especially carefully, as a couple of basis points could mean the difference between successfully meeting or failing to meet the funds' specified goals.
Therefore, total transaction costs are a very real concern for large institutions, and the consulting firms which address these issues - Elkins/McSherry, Plexus, and others - regularly report on such trends and advise buysiders on ways to minimize or avoid such costs.
LPS5
P.S. For anyone who might be shocked by our domestic transaction cost numbers, in some foreign markets, the total transaction costs add up to nearly 1,000 basis points; 10% of the principal value of the transaction. Without jumping beyond the scope of what I'd hoped would be a merely informational post, this explains - to some extent - the reason why many firms and funds looking for exposure to overseas markets have embraced structured OTC derivatives like swaps in place of trying to trade the actual foreign equity or fixed income instruments ("ordinaries") of certain high-trading-cost countries. |
