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January 3, 2011

Behind the Drop in Trading Costs

By Peter Chapman

Trading costs for institutions are lower, according to the number crunchers. The conventional wisdom holds that's because of rule-driven market structure changes. But is that really the case? Two buyside traders offered different views on the topic at this year's Investment Company Institute conference.

Kevin Cronin, global head of equity trading at Invesco, said lower costs are due to market structure changes. "Five years ago we had an NYSE one-size-fits-all marketplace," Cronin told the crowd at ICI during one morning panel. "Now we have more choice, and we have control over our order flow. Executions are faster and transaction costs are lower. The evolution of market structure has brought benefit to institutional investors."

Not so, said Matt Lyons, global trading manager at Capital Research and Management Company, who spoke on a later panel. Lyons agreed that trading costs have come down, but attributed the decline to a decrease in volatility. "The notion that costs have come down because of changes in market structure is spurious," Lyons told the ICI crowd. "Our costs are in line with volatility." The exec noted that costs came down even before Regulation NMS eliminated the near monopoly held by the New York Stock Exchange. "During the 2003-2006 period, when volatility came down, costs came down dramatically," Lyons said.


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