Commissions

It is quite frustrating that commissions arrangements are so opaque.   Basically professional trading firms have to negotiate with the venues (if you are big enough to go direct) or with your prime broker.

I was previously on the “sell side” so have a pretty good idea of what commissions were in the FX & Rates markets.   I don’t have much idea about this on the equity side though.

I have a new strategy in the equities markets and trying to determine what sort of commissions would be involved.   It would be good to know what the sell side and hedge funds “see” in terms of fees as a point of reference.    What sort of upside woud one have in terms of commissions should one structure as a well capitalized fund?

So I did a bit of digging on the web.   The only information out there that I can find is for retail.   On the retail side (I use IB at the moment):

I’ve run across a number of articles like this, indicating commission costs of ~ 2 cents / share for institutional trading (this must be a typo or I am misunderstanding the article).

I’m sure fees on the equity venues are much less than the bid/ask spread (which for liquid issues is 1 cent or less).   In fact some venues provide rebates (give you money) if you are providing liquidity rather than aggressing.   Now for a buy-side firm with a prime-brokerage arrangement, whose goal is not equities market making, the costs must be quite a bit higher than going direct.   I would guess would still be less than 1/100th of retail.

In any case, I am trying to get a better handle on what the true costs are for different situations.   If anyone has some indicative #s for commissions on the buy side would be appreciated.

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3 Comments

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3 responses to “Commissions

  1. Buy side firms have paid up to .05/share–but this is for research access to analysts and some of the ‘trading huddle’ wink wink nudge nudge sessions.

    Reasonably respectable funds over a billion will very likely spend a few million. I won’t name names but google will.

    Outside of the US I have seen up to 40 bps for research comp. At some point a buy side firm will say….ok guys we ae going down to 15 bps because I have paid for enough of you research this year. It is a perception of value of the research. If it is worth too much it doe beg the question: is this a level playing field?

    How low can you go? Pretty low. As you point out you can get paid for liquidity. But it should not be the size or capitalization but the volume of trades. In different shapes and forms a broker is trying to cover costs, so the lower touch client will get a better rate. Or hurdle. A big IB will probably want to make >250k from an electronic trading customer. So the rate is really about getting over the costs of servicing you and making a profit since there is little marginal cost to them per trade. If you are a floor market maker the clearing firm will give you a yearly rate and the rest of your fees are just exchange fees. And these go down if you own a seat or a few seats.

  2. It varies incredibly widely. As sharpend points out – it can even be a positive #! I’ve seen professional fund mgrs & RIAs happily pay *much* more than you pay with IB because it’s a ‘platform’ to them and they value the whole slew of services provided which allows them to effectively single-hand the whole process from trading to research to regulatory reporting, marketing, fund-raising and more. Others pay low millis in the worst case but spend great energies devising clever routing algos to optimise executions based on a variety of factors which will frequently bring the numbers down incredibly. (And actually constitute their own first-class algos themselves.)
    Considering the number of venues and their various and frequent special deals & incentives etc, the variety of business entities which can trade (and the internal flows they may be able to trade against), and good old fashioned contractual leeway, it’s easy to see that the answer is bigger than a breadbox.

    To me, the bottom line is always: do you make money trading it? If not, I think it’s simplistic to assume that a different commission structure is going to turn a loser around for you, particularly if you haven’t implemented any kind of execution optimization as part of your analysis.

    • tr8dr

      Thanks for the note. My interest in commissions is in knowing what frequencies of trading are viable for a given brokerage relationship.

      The strategy I currently have does very well (even) with retail commissions, however, should I consider implementing at a much higher frequency the spread, execution, and commission are quite important.

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