True Trading Costs represent the comprehensive sum of all expenses incurred during a trade, extending beyond explicit fees like commissions to include implicit costs. These implicit costs often comprise market impact, slippage, and potential opportunity costs.
Mechanism
Calculation involves aggregating direct transaction fees, such as exchange and brokerage commissions, with the quantified effects of market impact, which is the price change caused by the trade itself. It also accounts for slippage, the difference between the expected price and the actual execution price, and may consider the cost of capital tied up or lost opportunities.
Methodology
The methodology centers on a holistic evaluation of trade execution efficiency. By accounting for both explicit and implicit costs, institutions and sophisticated traders can accurately assess the real economic impact of their trading strategies. This comprehensive analysis supports optimization efforts to minimize total transaction expenses and improve overall trading performance.
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