Outside of last week’s look at the state of the economy, most of these Insights of late have been about trading, mostly thanks to the bizarre price action of GameStop and normally obscure parts of the market, like SPACs (click here, here, or here to see these articles).
Two weeks ago, the focus was on getting good ‘execution,’ which means getting good prices when we trade. Execution, and some of the murky practices surrounding trading, were the focus of some Congressional hearings last week, and although I wrote about it extensively recently, I have some data that I’d like to add.
In 2014, my favorite financial author, Michael Lewis, wrote a book about trading execution and some of the practices that the Robin Hood story revolves around today. As much as I love Lewis and his books (Liar’s Poker, The Big Short, and Moneyball to name a few), I was annoyed because he went on 60 Minutes and said that the market was ‘rigged.’
Well, that annoyance was good because it prompted me to hire a third-party firm to measure the quality of our trade execution. I thought we got good execution and was very happy when they confirmed as much.
I’ve been reporting the results for years and have the 2020 results for you today.
In 2020, our traders executed 21,662 trades worth $553.7 million. In my opinion, those are remarkable numbers for four traders, but it’s pretty average for them: in the previous six years, they’ve averaged 20,844 trades per year with an average value of $565.1 million.
The trading cost of those trades, as measured by the price that we got and the best price in the market at the time of our trade, was $12,800, which amounts to less than one-quarter of one-quarter of one percent!
That’s actually a little better than usual – the average over the previous six years was 0.0030 percent, and last year was 0.0023 percent. What’s interesting about the results, though, is that all of the cost was in the first quarter, when trading was the craziest.
That makes perfect sense to me since trading was frenetic and our traders were so swamped with orders that they couldn’t follow all of the best practices that result in better execution.
The report shows that in the remaining three quarters of the year, our traders were so good that the extracted value from the market. Although it happened in 2016, that’s not what I would expect.
I expect us to lose a little to the market all of the time since we are price-takers, not market-makers. I think the goal is to keep the trading cost as small as possible, and I’m thrilled that the cost is minimal.
As usual, all of the credit goes to our star traders: Minjung Son, Seongpil Hong, John Disterhaupt, and Ryan Craft. A lot goes on behind the scenes, and this group of people does an amazing job of working with PMs to make changes to your portfolio and then take the trades to market and get good prices on top of it all.
Please join me in thanking this vital part of Acropolis!