Equity trading costs in developed Asian markets increased by 100% – and leapt by more than 200% in certain other of the region’s markets – in the two years to December 2008, largely in response to heightened volatility, according to a study by agency broker and technology provider Investment Technology Group (ITG).
In addition, the ITG study reported rises of up to 350% in the standard deviation of trading costs – the number of trades whose costs are far removed from the average – since the start of 2007. ITG is also a provider of transaction cost analysis and related services.
For a manager trading a $250 million cap-weighted basket of Nikkei 225 securities, for example, average trading costs have risen from $800,000 in Q4 2007 to $2,100,000 in Q4 2008, ITG estimated.
The study, conducted via ITG’s Logic pre-trade tool, found that spreads and trading costs started to rise across all markets in line with the onset of the global credit crisis around the second half of 2007. They levelled off towards the end of 2007 and through the first half of 2008, before continuing to rise in the second half of the year. The sharpest increase in trading costs was in Q4 2008.
Both trading costs and the standard deviation of trading costs increased more for the developed Asian countries analysed than the emerging markets. One reason for this, suggested ITG, is the greater tendency of developed markets to be adversely affected by increases in volatility and negative sentiment. Developed markets, however, may be quicker to react to increasing trading costs and similar increases may be witnessed across emerging markets in the coming months.
The study pointed out that spreads – which exert a significant influence on overall trading costs – continue to vary widely across the Asia-Pacific region.
ITG said that while the relationship between bid-ask spreads and trading costs is widely documented, the disparity of Asia’s market structures and spread profiles present traders, portfolio analysts and managers with many challenges when factoring costs into trading decisions.
Spreads were calculated by considering the stocks that constituted the major index in each market at the period of time analysed, to ensure spreads and trading costs are not unduly skewed by illiquid small-cap names. The spread is determined by the median spread for the stocks in each index for the period analysed. To calculate weighted average trading costs, a US$1 billion portfolio was spread across each market presented based on the market cap weighting of that market across the region.