The spreads on trading costs in Australia
rose more than any other Asian market over the past 12 months to October.
from ITG’s transaction cost team found that the median spread on trading costs
rose from 22 basis points in October 2007, to 57 bps by October 2008, or by 162
per cent, the highest in Asia. Median trading
costs also rose from 14 bps to 34 bps, or by 141 per cent, an increase second
only to China
(182 per cent). Michael Corcoran, director of sales and trading at ITG, says
that the total ban on short selling, which reduced the liquidity in the market,
was partly to blame.
He also suggests
there may have been a lack of investor confidence in the large, cheaper
brokerage desks, due to their unknown exposure to the financial crisis. There
has been a “flight to quality” on the part of some institutions and hedge
funds, who chose to execute more trades with agency-only brokers that were not
exposed to the same organisational risks, he says.
Not only had spreads widened
and average trading costs increased across Asian markets, but there was an even
more significant increase in the standard deviation of trading costs. Volatile markets
tend to incur far higher cost ‘outlier’ trades, which can disproportionately erode
alpha, he says.