The Rise and Partial Fall in the Cost to Trade

The cost to trade US stocks rose by over five-fold during the reaction to the COVID-19 pandemic. In this report we look at the primary drivers of that change, the sector level changes in trading costs, and the impact of time on trading.

Synopsis:

• At the end of March, the cost to trade US stocks remained three times higher than in January.

• Liquidity, Volume and Spread are the primary constituents of the cost to trade. Our analysis shows that liquidity and volume largely canceled out, leaving spread as the proxy for trading cost. Spread remained three times normal and block crossing was the optimal way to save this cost.

• Volatility increases the cost to trade and people turn to averaging strategies to avoid being run over. Our analysis shows that the period of price discovery was very quick, with the majority of recent price moves in the first five minutes of the day. Thereafter returns were much more stable, meaning you had the full suite of trading tools at your disposal and there was minimal extra risk associated with trading blocks.

Read the report here.

Written by Simon Maughan, Liquidnet Global Product Manager + The Liquidnet Data Science Team