Transaction cost

The complete cost of dealing, of which the visible charges are only part. Costs divide conventionally into explicit and implicit. The explicit ones are quoted in advance and appear as their own line: commission, and any financing applied to a position held past the daily cut off. The implicit ones are paid through the price: the spread, crossed once on entry and once on exit, and slippage, the difference between the price on the screen when an order is sent and the price it is filled at. Only the sum of all four describes what a position cost.

The arithmetic is straightforward and the comparison is not, because the components are quoted in different units. A spread is quoted in price increments, a commission per lot or as a percentage of notional value, and financing as an annual rate applied nightly. Converting all of them into one figure in the account currency, over the actual holding period, is the only way two pricing models become comparable, which is what the phrase all-in cost names. Two accounts, one quoting raw spreads with commission on top and one quoting a wider spread with no commission, are frequently far closer than either headline suggests.

Two things are commonly underestimated. Cost scales with turnover, not with capital, so a method that deals many times a day pays the entry and exit spread many times a day, and a small per trade figure becomes the dominant term over a year. And financing is a cost of time rather than of dealing: it accrues nightly whether the position is right or wrong, which makes it immaterial on a position held for hours and material on one held for months. Practitioners disagree about how slippage should be counted, since it is measured against a reference price whose choice is itself a convention, and it can fall on either side of that reference.