Splitting trades the key to cost saving - research
Splitting trades over one hour reduces costs by two-thirds compared to executing a trade immediately, New Zealand researchers find.
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New research from Massey and Auckland universities suggests traders of gold, livestock or energy could save money staggering deals over the course of an hour.
Massey’s associate professors Nuttawat Visaltanachoti and Ben Marshall together with Dr Nhut Nguyen, of Auckland, documented the costs of trading various commodities and quantified the benefits of splitting large trades into smaller components.
They show splitting trades over one hour reduces costs by two-thirds compared to executing a trade immediately.
The researchers studied the 24 commodities in the Goldman Sachs Commodity Index, including agricultural, energy, industrial metal, livestock and precious metals.
They also found that the daily price change per unit of volume-traded measure does the best job of measuring variations in the actual cost of trading commodities. Knowing this simple-to-calculate measure is accurate makes it easier to study commodity liquidity over a long time period.
Their findings have recently been published in one of the world’s top finance journals, the Review of Financial Studies, in a paper entitled Commodity Liquidity Measurement and Transaction Costs.
“We hope companies looking to hedge their commodity risk will benefit from using their transaction cost numbers in their cost-benefit analysis. They should also be useful for investors when deciding whether it is worth diversifying into commodities,” says Dr Marshall, of the School of Economics and Finance.
Niko Kloeten
Tue, 30 Aug 2011
Tue, 30 Aug 2011
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Splitting trades the key to cost saving - research
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