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The Icebergs of Transaction Costs


Source: The Plexus Group

The legend for the larger-cap trade (on the left) reads: "Average Order: 120,000 shares in a $20 billion company, representing 1% day's volume."

The legend for the small-cap trade reads: "Average Order: 50,000 shares in a $450 million company, representing 5% day's volume."

The visible part of the iceberg consists of brokerage commissions and market impact costs (price movement while an order is in the broker's hands).

"Delay" occurs when orders are sitting on a fund's trading desk, but aren't released to the broker because the trader is afraid of swamping the market.

"Missed trades" are a natural consequence of delays: If the price moves too much before the trade can be completed, the manager will pull back on the trade.