High Frequency Trading and Costs

                       

Among costs, added to the "expense ratios" of mutual fund investors, is the bid-ask spread. A wide spread means the fund must pay significantly more to acquire a stock than it could sell it for.

                       

High- frequency trading has reduced this cost by narrowing the spreads. Wide spreads are seen as inefficiency, with buyers and sellers having difficulty agreeing on a price that accurately reflects what is known about a stock. Narrow spreads mean the market is working better.

                       

Another transaction cost arises from a fund's huge trades; they can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce this "market-impact" cost by making it easier to break big trades into many little ones, while  conducting them very quickly,

                       

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%.

                       

Therefore, high-frequency trading isn’t always the villain

the financial media purports it to be.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)