Transaction Cost Analysis

What Is Transaction Cost Analysis?

Transaction cost analysis is a framework to analyze costs related to trading financial instruments compared to appropriate benchmarks. It allows financial professionals to quantify brokers’ performance on trade execution, optimize trading algorithms, and improve their investment decision process.

Transaction cost analysis is an important tool for traders and fund managers, as well as risk managers. You can apply transaction cost analysis to many situations such as:

  • Estimate the market impact of trading execution
  • Determine the concentration risk limit for investment portfolio
  • Evaluate the performance of execution traders or brokers
  • Improve portfolio performance by reducing the transaction costs
  • Backtest the quantitative trading strategies
  • Maximize the portfolio alpha
  • Create cost curve

For more on tools for transaction cost analysis, see MATLAB® and Datafeed Toolbox™.

See also: momentum trading, algorithmic trading, statistical arbitrage, concentration risk