What a round turn actually costs

The unit being priced 

The complete life of a position is two transactions, the one that opens it and the one that closes it, and the pair is called a round turn. It is the only unit in which a cost can be stated without ambiguity. A cost quoted for one transaction is half of what a position incurs, a cost quoted per round turn is the whole of it, and the two labels look almost identical. From here every total is a round turn total unless a line is described as belonging to one side.

The total assembled across a round turn is conventionally called the all in cost, a phrase worth reading suspiciously wherever it appears. It is only all in with respect to the lines that were included, and different sources include different lines.

The lines a round turn can contain 

Five lines can arise, and each has already been taken on its own. Named together, in the order they are usually met, they are:

• The spread, met once on the way in and once on the way out, collected by the prices themselves rather than deducted.
• Commission, where the arrangement carries one, debited per side, so a round turn meets it twice.
• Financing, applied per night on the full contract value to a position still open at the daily cut off. A position closed within the session never reaches it.
• Slippage, the distance between the price on the screen when an order was sent and the price it filled at. Nobody charges it, and it sits inside the fill.
• Conversion, where the currency an instrument settles in differs from the currency the account is denominated in, applied to every amount crossing between them.

Two of those five are charges in the strict sense: commission and financing arrive as their own entries, with a date, a description and an amount. The other three are already inside a price or a rate by the time anyone reads them. A charge can be read off a statement. A cost embedded in a price has to be reconstructed.

Which lines scale with size and which with time 

The five lines respond to two different variables, and separating them makes the total predictable in shape even where it is not predictable in amount.

• Size only. The spread is a per unit cost, so doubling the position doubles it and holding it for a month changes it not at all. Commission behaves the same way on either basis it is charged on, both being proportional to size and indifferent to duration.
• Size and time. Financing is a rate applied to the contract value once per night, so it responds to how large the position is and to how many nights it survived. It is the only line that grows while nothing whatever is happening.
• The amount converted. Conversion is a proportion of each amount crossing currencies, so it applies to charges and to the result alike rather than to the position directly.
• Neither, reliably. Slippage is a property of a particular fill. Larger orders reach further into the resting interest, so size is related to it, but it is not a rate and cannot be multiplied out in advance.

So the same position on the same instrument has a different cost shape depending only on how long it stayed open. Closed within the session, the total is spread plus commission plus whatever the fills gave up. Held longer, financing accumulates one night at a time while the other lines sit still, and past some number of nights it becomes the largest line in the column. That is not a fact about the instrument. It is arithmetic about the holding period.

Assembling one round turn 

The assembly is addition, with one condition: every line is expressed in the same currency before any of them is added to another. The position's own profit or loss is a separate calculation, and the cost total is subtracted from it rather than mixed into it.

Reading the column downward is the point. Four of the five lines are identical in both directions and the fifth is not. The largest single line under these assumptions is the spread, which no statement will ever show, and the next largest on the long side is financing, which did not exist when the position opened and grew every night thereafter without any price moving.

Where each line appears, and where it does not 

A statement is a record of charges, not a record of costs, and that difference is why a total assembled by hand rarely matches a total read off a screen.

1. The spread appears nowhere, being inside the opening and closing prices, recoverable only by comparing the price a position transacted at with the other side of the quote at that moment.
2. Slippage appears nowhere either, being inside the fill price, measurable only against the price on the screen when the order was sent, and so only if that price was recorded.
3. Commission appears as its own entry, twice, once against each side.
4. Financing appears as its own entry, once for every night held past the cut off, so a long holding generates a series of small entries rather than one large one.
5. Conversion appears as an explicit line or as nothing at all, by convention. Folded into the rate applied, its only evidence is the distance between that rate and the mid market rate at the same moment.

Reproducing the calculation on another instrument 

The conventions change from one instrument to another. The method does not. Performed in this order, nothing is converted twice:

1. State the position completely: instrument, size in that instrument's own convention, direction, and the number of nights it stayed open past the daily cut off.
2. Turn the spread into money using the instrument's own increment and contract size: a pip for a currency pair, an index point for an index contract, the smallest quoted increment for a shares contract.
3. Add commission on whichever basis it is charged on, counted twice. Where an arrangement carries none, the line is zero and is written down as zero rather than left out.
4. Add financing for each night held, on that instrument's own basis: a rate differential for a currency pair, a benchmark rate with an adjustment for an index or a shares contract. A shares contract also carries a dividend adjustment on an ex dividend date, a distinct line and not part of financing.
5. Enter the difference between each fill and the price on the screen when that order was sent, where it was recorded, as its own line.
6. Convert every line into the account currency at the rate applied, and add the conversion charge on each amount converted.

The two cases in that block are the same position, the same size and the same fills, and the totals differ only because of nights. None of that is a general truth about index contracts. It follows from the assumptions written into the block, which is why the assumptions are written down.

What is known in advance and what is not 

Three of the five lines are quoted before a position exists: a spread is on the screen, a commission is published per arrangement, a conversion charge is a stated proportion. The other two are not knowable then in any form. Slippage is a property of a fill that has not happened, and financing beyond tonight depends on rates not yet set and on how many nights the position turns out to survive.

So an all in cost computed before a position opens and one computed after it closes are two objects wearing the same name. The first is an estimate on three known lines and two assumed ones. The second is a reconstruction from the fills and the entries. Setting one against the other is not a comparison of two costs.

Where practitioners disagree 

The first disagreement is whether financing belongs in the cost of a trade at all. One convention holds that the cost of a trade is spread plus commission, since those are incurred by transacting, and that financing is the cost of a holding, belonging against the decision to keep a position open rather than the decision to open it. Another holds that the distinction is bookkeeping, that the money left either way, and that a figure excluding financing understates what a position held over several nights cost. Both are internally consistent. What matters is that a figure computed under one is not comparable with one computed under the other, and neither convention is usually stated beside the number it produced.

The second is whether slippage is a cost or a variance. It is symmetric in principle, since a fill can land better than the screen price as easily as worse, so one tradition excludes it from cost and measures it separately as a characteristic of execution. Another argues that a variance whose average is not zero is a cost under any useful definition. Both agree that measurement decides it, and disagree about whether one participant accumulates enough fills for the measurement to mean anything.

Underneath both runs a third argument, about the unit. Cost can be expressed as money, as a distance in the instrument's own increment, or as a proportion of contract value, and the three orderings do not always agree when several instruments are set side by side. The next lesson takes the consequence of a cost total for the point at which a position is level.

What a published figure covers 

Firms publish cost one line at a time, per instrument and per account arrangement, because a single line is the only form in which a figure is checkable. At YAL the typical EUR/USD spread on the Raw Spread account is 0.1 pips, with a commission of $3.50 per lot, per side. Neither figure is an all in cost for a round turn, and neither is presented as one. The spread figure describes one line on one instrument under sampled conditions, the commission figure is stated per side and so is met twice, and between them they say nothing about a night held or a currency conversion.

The conversion line depends on an arrangement rather than on a market. It arises only where the currency an instrument settles in differs from the currency the account is denominated in, so the account currency decides whether the line exists at all. The base currencies at YAL are USD, EUR, AED.

Assembling the published lines into a total for a stated instrument at a stated size is arithmetic, and it is the job of the cost of trading calculator, which shows each line separately before it sums them. A total whose lines are hidden is the thing this lesson exists to take apart, and the last lesson in this module sets out a method for comparing costs across firms without naming one or claiming anything about another.