Actual Global Stock Trading Frictions

How, and how well, do institutional equity traders manage global stock trading frictions? In the April 2018 draft of their paper entitled “Trading Costs”, Andrea Frazzini, Ronen Israel and Tobias Moskowitz examine the real-world trading frictions of a large trader. They define trading frictions as the difference in results between a theoretical portfolio with zero frictions and a practical tracking portfolio with frictions. They account for all components of trading frictions: broker commissions, bid-ask spreads and price impacts of trading. They record market price at trade initiation, volume traded and execution price for each share traded, as well as type of trade (buy long, buy-to-cover, sell long or sell short). They describe how frictions vary by trade type, stock characteristics, trade size, time and exchange. Based on preliminary findings, they devise and test out-of-sample a price impact model based on market conditions, stock characteristics and trade size calibrated to actual U.S. and international trades. Using $1.7 trillion of orders and trade execution data from a large institutional money manager spanning 21 developed equity markets during August 1998 through June 2016, they find that: (more…)