Perspective – Have Modern Markets Really Brought Your Institutional Transaction Costs Down?


Ever since the SEC issued its 2010 Concept Release on Equity Market Structure, there have been no shortage of industry participants claiming that your trading costs have come down. For example:

ITG wrote this in 2010:

We believe that the U.S. equity markets are strong and require few, if any, new regulatory initiatives. In the last seven years, bid-ask spreads have narrowed and liquidity has increased in the equity markets. Trading volume has increased from nearly three billion shares per day in 2003 to nearly ten billion shares per day in 2009.5 In addition, trading costs are lower and execution speeds have increased. In fact, institutional trading costs in the United States are among the lowest in the world.

Getco wrote this in 2010:

We believe that the current national market system is performing extremely well. For instance, the performance during the 2008 financial crisis suggests that our equity markets are resilient and robust even during times of stress and dislocation. Indeed, it is GETCO’s strong view that the fundamental principles of our equity markets efficiency, innovation, transparency, lower costs for investors, fair access, and above all else the ability of market participants to vigorously compete-have never been more prevalent than they are today.

The man who loves Market Structure Roundtables that never accomplish anything, Rep. Scott Garrett, weighed in:


By many measurements, the markets for retail and institutional equity investors are as healthy as they have ever been.


Vanguard weighed in:


Over the past fifteen years, the competition among trading venues and significant technologtcal advancements have greatly reduced transaction costs for all investors across our markets.


In late 2014 Fidelity weighed in as well, and the HFT lobbying group – Modern Markets – was thrilled to spread Fidelity’s comments around:


From an institutional or buy-side perspective, today’s markets are more efficient than anytime in the past. Today’s markets are faster, they’re cheaper to trade, the typical buy-side desk has more choice due to competition in terms of execution venues, whether they’re block trading systems or dark pools, registered ATSs, and algorithms that we can customize that allow us to navigate electronic markets and obtain the best possible price for our fund shareholders.


Interestingly, Fidelity quotes ITG in their claim that institutional implementation costs have plummeted from 2001 – 2013 (116bp to 32bp). Fidelity and ITG pick those reference points carefully.


This morning, we would like to share with you just one chart:

TC Chart.jpg


This chart is from the seminal, often –cited, market structure paper from Angel, Harris, and Splatt – Equity Trading in the 21st Century (updated).


Please note how we “flat line”  from 2002 through 2013. Simply stated, institutional transaction costs to execute a million shares of a $30 stock have not come down at all.

Despite Reg NMS, despite the proliferation of high frequency trading strategies, despite the proliferation of dark pools, despite the proliferation of special order types, despite universal maker-taker, despite data feeds, despite colocation, despite the back room dark pool – ELP deals, despite the amplified complexity, despite the meteoric increase in execution speeds, and despite all billions of dollars we all have spent to keep up in this arms race, we remain where we were thirteen years ago.

Wait… if the benefits of all these modern markets enhancements have not accrued to us, then who have they accrued to? Ask Modern Markets’ members. Ask the dark pool owners. Ask the exchanges who sell data. Ask those who escalated the arms race and profited from it.