Pairs Trading Commission Help

F

FishSauce

Hi,

I need some help regarding commission structure for pairs trading.

As some of you might remember, I was the one inquiring about setting up a newsletter.

I just "manuffactured" a new pairs trading system for daytrading, but am running into roadblock regarding its feasibility, any help would be much appreciated:


4 pairs --> 8 total trades, roundtrip
close-to-close

The average Rate-of-Return per day is 0.79%.

My question is will commission eat up by profits to the point where it's no longer feasible to implement??? Moreover, if it COULD be profitable, can you give me a ballpark notional value ?

i.e. The necessary startup capital that is large enough to absorb the impact of the Commission.

Thanks in Advance,
---Fish
 
You will need to execute 16 transactions. Not taking into account slippage which could be anywhere from a 2 or 3 cents to as much as 25 cents or more, per pair executed. You are probably looking at about $20.00 per 100 shares. If you do larger size, you can significantly reduce these costs, but for a newbie, that's probably what you should expect to pay. As for start up capital, you will need 5 or 6 thousand per 100 share leg in each pair.
 
I am looking at IB's, and this is how I figure..


USD 0.01/Share for 500 shares

Assume average stock price = $18

500*0.01 =$5

$5 * 16 trades = $80

500 shares * 16 trades * average price ($18) = $144,000

Thus commission = $80/$144,000

= 0.056%

I am missing smthg...my math cant be right ...:(
 
Quote from mschey:

You will need to execute 16 transactions. Not taking into account slippage which could be anywhere from a 2 or 3 cents to as much as 25 cents or more, per pair executed. You are probably looking at about $20.00 per 100 shares. If you do larger size, you can significantly reduce these costs, but for a newbie, that's probably what you should expect to pay. As for start up capital, you will need 5 or 6 thousand per 100 share leg in each pair.
More...

So its basically 20cents per share. But isnt IB's commission rate at 1 cent per share up to 500 shares?

At 20 cents a share, assuming an average price of $18 a share. Commission would be 1.1% ... man ..that's a b*tch.
I think my math is wrong somewhere...

P.S. Thanks for replying
 
Quote from FishSauce:

Hi,

The average Rate-of-Return per day is 0.79%.

My question is will commission eat up by profits to the point where it's no longer feasible to implement??? Moreover, if it COULD be profitable, can you give me a ballpark notional value ?

---Fish
More...

one of ways to figure this out-try it.
tell you-this is one of the reasons, why i give up on pairs-very limited profit, unlimited risk. and commissions. it does make very big sense, if you trade same pairs and price drop with market.
i trade semis a lot and when on market bottom commissions eat big chunk of my profits, because all of them somewhere around 10-15 bucks. profits still same, but commissions rise very quick. try to pick expensive stocks like > $30
don't pick $10 crap. IB is good for small lot's. if you trade pairs in 500-2000 or more shares-man...you will be surprised by end of the month, how much you did pay for commissions.

Good Luck!
 
Quote from Bob111:



one of ways to figure this out-try it.
tell you-this is one of the reasons, why i give up on pairs-very limited profit, unlimited risk. and commissions. it does make very big sense, if you trade same pairs and price drop with market.
i trade semis a lot and when on market bottom commissions eat big chunk of my profits, because all of them somewhere around 10-15 bucks. profits still same, but commissions rise very quick. try to pick expensive stocks like > $30
don't pick $10 crap. IB is good for small lot's. if you trade pairs in 500-2000 or more shares-man...you will be surprised by end of the month, how much you did pay for commissions.

Good Luck!
More...

Yeah, Pair Trading is a b*tch when it comes to commission.
 
Each 100 share entry into and out of a pair is 4 trades. Buy, SS,Cover, Sell. You are basically trading 400 shares * .01 per share=$4 per trade per pair. Add to that, the SEC fees of about .20 per share, and you get a grand total of $4.80, or about $20 per 4 pairs traded. Then, add to this slippage. If you can execute well, you will not have much slippage, if you can't execute well, then slippage will kill you. There is an art to executing entries and exits on pairs.

Mike
 
You must log in or register to reply here.
Back
Top