Transaction costs fell significantly in the US and Europe in the six years preceding 2012, and the least in Asia in that period, observes a study on market structure by Credit Suisse analysts Phil Mackintosh and Liesbeth Baudewyn.
Transaction costs on the rise in the past two years
However, “in the past two years, all regions have seen a general increase in transaction costs as volumes have declined,” say the analysts.
Note that commissions are just one aspect of trading costs. Transaction costs refer primarily to the difference between an investor’s average trade price versus either 1) the last price traded or 2) midpoint of the bid-ask spread when the investor began trading. Therefore, transaction costs are also affected by the market volumes, volatility and trading regulations.
CS’ Transaction Cost Index
In the chart below, note how Credit Suisse’s Transaction Cost Index for the US (represented by the black line) fell precipitously by nearly 30% between 2006 and 2011, when it reached a nadir. From then on, these costs have been trending upwards (dashed black arrow).
Yet the difference is stark in the Asian markets. Note in the chart below that the black line representing transaction costs is trending higher compared to its US counterpart.
The difference in transaction cost trends could be explained by market structure and the timing and type of new rules across regions, according to the authors.
On an overall basis, however, the study finds that “more competition (between venues and between investors) seems to be a good thing.” It also proposes that the fragmentation and competition seen in the US markets (number of exchanges) is actually good for costs, though complexity may have grown.
Reasons why transaction costs are creeping higher, globally
- Presumably, and particularly in the US and Europe, transaction costs have moved higher once High Frequency Trading (HFT) peaked out. The study points out that an over-allocation to HFT strategies back in 2010 may have artificially depressed the cost of liquidity; ultimately, that may have resulted in super-optimal trading conditions for real investors.
- New regulations, such as transaction costs in France and Italy, bank capital levels, and those relating to the functioning of the markets such as circuit breakers, are having an impact.
- Trading volumes and turnover are sharply down in Europe and the US.