Hidden cost of free trading? US$34B a year, study says
BNN Bloomberg
Last year, five U.S. professors opened two brokerage accounts and placed identical orders to test an algorithm. The next day, one was down by US$150. The other was up US$12.
They discovered it wasn’t a one-time anomaly.
Over more than five months, the academics used their own funds to execute 85,000 trades in 128 different stocks and made what they consider an important discovery: They were getting significantly different prices to buy and sell shares, depending on which brokerage handled the trade. Extrapolating from the results, they estimate it costs small-time US investors as much as US$34 billion a year, said Christopher Schwarz, the finance professor at the University of California, Irvine who wrote the study along with four colleagues.
The paper indicates there are hidden costs to the day trading that’s proliferated along with no-fee brokerage accounts. That’s because even though trades are funneled through a handful of wholesale market makers, including Citadel Securities and Virtu Financial Inc., the pricing can vary, according to the paper. And those small discrepancies can have a large impact overall.