18. Bid-Ask Spreads, Commissions, and Other Costs

  1. H. Kent Baker and
  2. Halil Kiymaz
  1. Thanos Verousis

Published Online: 23 AUG 2013

DOI: 10.1002/9781118681145.ch18

Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs

Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs

How to Cite

Verousis, T. (2013) Bid-Ask Spreads, Commissions, and Other Costs, in Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs (eds H. K. Baker and H. Kiymaz), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118681145.ch18

Author Information

  1. Senior Lecturer in Finance, University of Bath

Publication History

  1. Published Online: 23 AUG 2013
  2. Published Print: 16 AUG 2013

ISBN Information

Print ISBN: 9781118278444

Online ISBN: 9781118681145

SEARCH

Keywords:

  • order processing cost;
  • inventory cost;
  • adverse selection;
  • high-frequency trading;
  • electronic trading;
  • tick size.

Summary

This chapter examines trading costs associated with buying and selling securities in organized exchanges such as the New York Stock Exchange. Costs are categorized as commission charges determined by the exchange and cost components of the bid-ask spread determined by market participants. The bid-ask spread consists of three main components: (1) order processing costs associated with the cost of providing liquidity, (2) inventory costs due to short-term order imbalances, and (3) adverse selection costs related to the cost of trading with informed traders. Spreads and commission charges are currently at very low levels in developed markets and have led to a great expansion in algorithm trading and trading volume. Trading costs for emerging markets are considerably higher than for the more developed markets. Market capitalization and liquidity differences explain some of the variability in trading costs in exchanges around the world. Besides firm-specific differences, a second element of variability is attributed to differences in market structures.