Trading Costs
Read the paperopens papers.ssrn.com in a new tab
What they found
Using nearly two decades of actual trade execution data from AQR, covering over a trillion dollars of trades across 21 developed equity markets, the authors measured what it really costs a large institution to trade. Price impact was the dominant cost and rose with trade size relative to daily volume, while commissions and spreads were small. Actual costs were far lower than the estimates used in many academic studies, which rely on quoted spreads and extrapolated impact models, so several factor strategies previously thought untradable at scale appeared viable. They provide a simple impact model calibrated to real executions.
What you can use
- For patient traders, price impact, not the spread, is the main cost, and it scales with how much of daily volume you trade.
- Academic cost estimates are often too high; the real cost of trading liquid stocks slowly is small.
- The lesson for retail is the mirror image: your costs are dominated by spread and payment-for-order-flow effects, not impact, so avoid illiquid names and market orders.
Caveats
AQR's costs reflect sophisticated execution algorithms and patient trading that retail cannot replicate. Working paper by practitioners.
Tags: backtesting, transaction-costs, price-impact, execution
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.