True Trading Cost represents the comprehensive expense associated with executing a trade, encompassing not only explicit fees and commissions but also implicit costs such as market impact, slippage, and opportunity cost. In crypto investing, this holistic measure is crucial due to fragmented liquidity and high volatility, as implicit costs often significantly exceed explicit ones, particularly for large institutional orders. It provides a more accurate assessment of execution quality than simple fee analysis.
Mechanism
The mechanism for calculating True Trading Cost involves comparing the actual price achieved for an order against a benchmark price, typically the mid-market price at the time of order initiation or a volume-weighted average price (VWAP) over a short period. The deviation from this benchmark, adjusted for explicit fees, quantifies the total cost. Sophisticated algorithms aggregate data from execution logs, order book snapshots, and market data feeds to reconstruct the theoretical versus actual trade outcomes, identifying the components of slippage and market impact.
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