January 23rd, 2004, 2:10 pm
QuoteOriginally posted by: krI don't think it makes sense to separate upfront commision from slippage. In a way, block traders are doing a one-directional gamma bet: charge upfront to cover the expected slippage, and hope that your execution strategy leaves you something to take home when you're done. Actual performance, like dynamic hedging of an option, will be different, so there is a risk/return dimension to the problem. It's also like d.h. in that it need not be a one-shot control theory problem - i.e. in any realistic model, the block trader doesn't just dump all the shares on the market at once.It makes perfect sense to separate out commission from slippage. The question was whether the overall effect of transaction costs was concave or convex. By separating "transaction costs" into two constituents, it quickly becomes clear that there is a convex effect and a concave effect, with no a priori reason to say which one should dominate.Naturally, if you want to ask a much bigger question about all the effects that transaction costs have on your trading, you need to widen the discussion. But the question here is quite small and specific, no?