2003issue C031-4
Cheaper access still left a routing and cost problem
After commission deregulation, a long decline in rates made frequent entry and exit cheaper, while electronic networks were said to cut the spread individuals used to pay. The Level II book was judged overblown, and by late 2002 the teaching emphasis had moved to education and command of the direct-access system.
- After commission deregulation on May 1, 1975, most firms first raised commissions, while a smaller set lowered them and helped launch the discount brokerage industry.
- A 27-year decline in commission rates made frequent entry and exit cheaper, so a shorter holding period became more viable for individuals who had faced prohibitive round-trip costs.
- Electronic communication networks were described as narrowing the typical bid-ask spread and replacing the older stack of transaction, spread, and commission with a transaction fee alone.
- The Level II book was judged overblown because much of the visible minutiae is not meaningful for execution decisions, and by late 2002 teaching had shifted to education and command of the direct-access system.
Commissions did not fall in a straight line
After commission deregulation on May 1, 1975, most firms first raised commissions, while a smaller set of firms lowered them and helped launch the discount brokerage industry.
A 27-year decline in commission rates made frequent entry and exit cheaper. That change turned a shorter holding period into a more viable approach for individuals who had previously faced prohibitive round-trip costs.
What a professional round trip used to cost
One professional Intel round trip of 1,000 shares once cost $1,200 to enter and $1,200 to exit. The same size later became executable for pennies, illustrating how commission collapse changed what was executable.
Electronic networks and a thinner fee stack
Electronic communication networks were described as handling almost 70% of Nasdaq trading, narrowing the typical bid-ask spread and cutting the largest cost that individuals used to pay.
The ECN fee model was framed as a transaction fee alone, replacing the older stack of transaction plus spread plus commission and letting individuals trade with one another without a dealer in the middle.
Displayed depth was easy to overvalue
The Level II book was presented as a new window into displayed depth, but its importance was judged overblown because much of the visible minutiae is not meaningful for execution decisions.
Information closed a gap and created another
Internet distribution was said to close the historical information gap between institutions and individuals, while also flooding participants with more information than they can usefully act on.
By late 2002 the teaching emphasis had shifted from touting the book itself to requiring education and command of the computer and direct-access system before a trader could hope to execute well.
All readings on this track · 7 readings
- 1991Testing dealer inventory caps against a frozen order tape
- 2003Cheaper access still left a routing and cost problem
- 2006Order-book depth and passive flow for execution
- 2008Depth, close imbalances, and pairs on one clock
- 2012Checklist exits and the limits of visible book depth
- 2013Constructing forex orders from provider imbalance and book depth
- 2017Ladder, trail, and average as one execution ticket