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| The Handbook of Trading - Strategies for Navigating and Profiting from Currency |
Since the performance of all investment decisions are directly affected by
the quality of effecting such decisions in the marketplace and varies within
and across security types, all investors must carefully balance the marginal
benefits and costs of each transaction. Such costs include commissions, fees,
execution, and opportunity costs. Execution quality reflects various trading
demands for immediate liquidity (speed) based on different investment
styles and on the availability and cost of such liquidity at each point in time.
The latter includes the expected and actual impact of investor trade on
market prices and on the cost and likelihood of concluding the remainder of
a trade. Since execution quality is most often unobservable, it is imputed
from the data either as the difference between the actual trade execution
price and the price that would have existed in the absence of the trade or as
the difference (referred to as performance leakage) between the quoted or
actual trade price and its counterpart in the absence of trade costs (referred
to as the “fair” price). The time to complete a trade for a fixed concession
from the “fair” price is another dimension of execution quality, which can
not be measured using most available databases (such as the one used
herein) that do not provide information on order submissions and their subsequent
fill history. Execution quality also affects the pricing of securities
through its impact on value discounts.
Trade activity measures of liquidity include (un)signed number and dollar
value of shares traded and the number of trades. Metrics for measuring
expected or actual trade execution costs include quoted, effective and realized
spreads, and quoted depths. Hasbrouck (2009) provides a good review
of various measures of trade and market impact costs using daily data.
Earlier research focuses on the measurement of execution cost (e.g.,
Collins and Fabozzi, 1991), on the impact of execution costs on the speed
and method by which institutional investors should implement buy and sell
decisions (e.g., Bodurtha and Quinn, 1990; Wagner and Edwards, 1993;
Wilcox, 1993), and on trading costs in different international markets (e.g.,
Kothare and Laux, 1995). More recent studies examine the effects of
changes in exchange rules on execution costs across trading platforms (e.g.,
Venkataraman, 2001; SEC, 2001; Bessembinder, 2003; Boehmer, 2005) and
on institutional differences (Eleswarapu and Venkataraman, 2006).
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