How much should I think about commission and liquidity costs?

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Old Apr 14, 2016, 11:25am   #1
Joined Mar 2016
How much should I think about commission and liquidity costs?

I know that I should take into consideration commission and liquidity costs (bid-ask spreads) when considering placing a trade, however I am not sure how much should I worry about those? For commission I can pick broker with lower fees and try to negotiate better price, and for liquidity I can limit myself to trade only highly liquid options. Is there anything else here that I should worry about or do?

How do you estimate these costs and account for them when trading?
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Old Apr 14, 2016, 4:23pm   #2
 
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Originally Posted by runmael View Post
I know that I should take into consideration commission and liquidity costs (bid-ask spreads) when considering placing a trade, however I am not sure how much should I worry about those? For commission I can pick broker with lower fees and try to negotiate better price, and for liquidity I can limit myself to trade only highly liquid options. Is there anything else here that I should worry about or do?

How do you estimate these costs and account for them when trading?
This is tricky, because sometimes those low broker fees are directly correlated with them giving you less-than-ideal fills or wider spreads. You really have to be careful with discount brokers - less fees does not always mean that you will pay less in the long run.

You are totally right about negotiating the fees - especially if you have been a customer of theirs for a while. It never hurts to give them a call and discuss ways they can keep you as a customer by making your fees a little more attractive.

As far as picking a broker, I would speak to some of the more established traders on this board to see what they recommend. Picking a broker depends a lot on your particular trading style.

Hope this helps.
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Old Apr 14, 2016, 6:39pm   #3
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Originally Posted by runmael View Post
How do you estimate these costs and account for them when trading?
In my view, this is an excellent question!!

I believe it's important to think about your transaction costs, in particular what the costs are in proportion to your stop sizes and target sizes.

Consider converting your commission (if any) into pips/point - so that you can express all of your transaction costs as a pip/point figure - divide that by the smaller of your stop size and target size. Essentially, if prices move totally random, then this is your initial disadvantage, similar to a casino's house edge in the various games that it offers. So if your commission/spread equates to 1.5 pips and your stop size and target size is 20 pips - then your transaction costs equate to 7.5%. Thus the higher the % the better you need to be with your price predictions in order to overcome this initial disadvantage.

If you are a swing trader, then the % tends to be a lot lower, however you then also need to add rolling charges that you incur from day to day.

I wrote a fair bit about this on my trading blog - where I try to explain this using the game of roulette as an example. You can have a look at the blog post here. And another blog post here to illustrate the massive impact of transaction costs after several hundred trades.

Hope that helps
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Last edited by options-george; Apr 14, 2016 at 11:18pm.
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Old Jul 25, 2016, 7:46pm   #4
 
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Quote:
Originally Posted by runmael View Post
I know that I should take into consideration commission and liquidity costs (bid-ask spreads) when considering placing a trade, however I am not sure how much should I worry about those? For commission I can pick broker with lower fees and try to negotiate better price, and for liquidity I can limit myself to trade only highly liquid options. Is there anything else here that I should worry about or do?

How do you estimate these costs and account for them when trading?
I don't worry to much about commission if I'm swing trading and not placing too many trades in a given week. If I'm scalping the market of course I want a lower commission but using a great platform.

Just dependent on how much your volume is in trading.
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Old May 2, 2018, 1:22pm   #5
Joined Apr 2018
Certainly depends on trading style and expected win amount. If day trading a looking to chip away with small gains then slippage will be a major issue.

Trading size, anything greater than 100 contracts and you will 5 tick slippage on market orders just in YM futures.
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