Interview Question: A Question of Costs

Sample Question #37 (financial economics-related case question)

When you trade stocks, what are some of the different types of cost associated with your trading? How would you mitigate each type of cost?

(Hint: a cost need not be explicit…)

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2 Responses to Interview Question: A Question of Costs

  1. ralph says:

    like transaction cost or bid-ask spread?

  2. Brett says:

    ANSWER
     
    There are two major types of transaction costs: explicit costs and implicit costs.  Explicit costs are costs that the trader pays to a third party for executing the trades, such as commissions, spreads, taxes, fees, etc.  Implicit costs occur when the order is big enough to impact the market: e.g., it may drive the stock price up or down, it may entice other traders to front-run (thus increasing the total cost of the original order because the fills are worse than without information leakage), etc.
     
    Explicit costs are easier to control; just pick the best brokers, and think about tax implications before trading.  Implicit costs require trade execution optimization, such as using an algorithmic trading tool.
     

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