Exchange Fees May Vary, but Total Trading Costs Don’t

Dimensional’s approach to trading seeks to reduce implementation costs by participating in the natural trading that occurs in markets each day. “Blending in” requires expertise in pricing, sizing, timing, and routing orders. As markets and technology evolve, we continually conduct rigorous research on different aspects of market microstructure in order to improve our trading algorithms.

One important aspect of market microstructure is venue selection. US-listed securities can be traded on many different venues. As exchanges compete for trading activity, one point of differentiation across exchanges is how they charge fees and provide rebates. Some exchanges, termed “maker-taker” exchanges, charge fees for taking liquidity and offer rebates for providing liquidity. “Inverted” exchanges do the reverse, charging fees for providing liquidity and offering rebates for taking liquidity. Based on fees and rebates alone, it would seem that investors who provide liquidity should prefer maker-taker exchanges.

Dimensional’s Global Head of Equity Trading, Ryan Wiley, look at actual trades executed by Dimensional. They find that total trading costs, which consider fees, rebates, spreads, and market impact, are statistically indistinguishable across different types of venues. The implication is that orders can be routed across different venues without the unnecessary constraints that might result if decisions were based on an incomplete picture of trading costs.

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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