A new study offers a novel spin on how much investors really pay when they buy and sell stock on financial exchanges.
The study by Birinyi Associates Inc. of Greenwich, Conn., focuses not on broker commissions and other traditional measures of trading costs, but on the difference on what investors pay for a stock and its last trading price.Laszlo Birinyi, a veteran Wall Street trader and market commentator, calls his measurement "market impact." He says major pension funds and other institutional traders don't understand this concept and consequently understate the actual costs of trading.
Birinyi offered an example of market impact. If a pension fund buys 10,000 shares of a stock that last traded at $22 a share, but winds up paying $22.25 a share, their cost is $2,500, the study said.
"The trade by trade approach - while difficult - is also a more accurate measure of transaction costs," the study said.
By this measure, some of the biggest and easiest-to-trade stocks, such as Wal-Mart Corp., "actually have high associated costs of trading." Birinyi finds no conclusive reason why this is the case, but he said his study suggests the stocks with large average trade sizes tend to have higher costs.
Birinyi suggested one explanation may be in the conduct of specialists and market makers, who act as intermediaries on exchanges and pledge their own money to assure trading in stocks. The specialists and market markers may be reluctant to commit more of their own capital to process larger-than average trades, the study said.
While some interpret the study as criticizing the cost of trading on the New York Stock Exchange, Birinyi said his study was "not intended to endorse, criticize or make a policy statement regarding any trading system market structure . . . "