Transaction Cost Analysis A-Z

Table of Contents

Foreword ................................................................................................................. 3

Introduction............................................................................................................ 5

I. Transaction Cost Analysis as Part of the Investment Process................. 9

II. Transaction Cost Components and Drivers...............................................13 1. Direct Explicit Transaction Costs.................................................................................................14 2. Indirect Explicit Transaction Costs.............................................................................................15 3. Implicit Transaction Costs.............................................................................................................19 4. Transaction Cost Magnitude.........................................................................................................23 5. Transaction Costs and Execution Methods..............................................................................25 III. Measuring Transaction Costs with Post-Trade Analysis.......................27 1. Benchmark Comparison.................................................................................................................28 2. Implementation Shortfall..............................................................................................................29 3. Common Pitfalls and Shortcomings in Transaction Cost Measurement......................32 4. Measuring Transaction Costs under MiFID..............................................................................35 IV. Estimating Transaction Costs with Pre-Trade Analysis........................39 1. Collection and Analysis of Pre-Trade Data..............................................................................40 2. Cost and Risk Estimation...............................................................................................................41 3. Optimisation and Efficient Trading Frontier...........................................................................53 V. Trading Performance Measurement...........................................................57 1. Transaction Costs vs. Trading Performance.............................................................................58 2. Current State of the Industry and Practices...........................................................................58 3. Regulatory Pressure: MiFID and its Best Execution Obligation........................................64 VI. A New Framework: the EBEX Indicators..................................................67 1. General Presentation.......................................................................................................................68 2. Detailed Presentation of the Indicators...................................................................................70 3. Illustration of the Framework......................................................................................................77

Conclusion.............................................................................................................85

References..............................................................................................................87

About the EDHEC Risk and Asset Management Research Centre...........90

About CACEIS ......................................................................................................94

About NYSE Euronext.........................................................................................96

About SunGard.....................................................................................................98

Printed in France, November 2008. Copyright EDHEC 2008. The opinions expressed in this survey are those of the authors and do not necessarily reflect those of EDHEC Business School, Caceis, Euronext or Sungard.