System Design  |  APR 2002

Frictional Costs In Futures Trading by Jesse Wolff

Frictional Costs In Futures Trading by Jesse Wolff If we could trade in a perfect, cost-free world, there would be many more systems that would exhibit profitable return profiles. But we don’t. So what can we do about frictional costs? The futures market is not a zero-sum game, and there is a level of friction — that is, cost — that must be accurately reflected in the research process and resulting profit/loss profile of any system being developed. This cost will vary depending on various factors, including the contract size of the market traded, the trading medium (electronic vs. floor brokers), the frequency of trading, the type of order used, how that order is placed in the market, the specific trading strategy, the bid/offer spread, the time of day, day of the week, brokers used, and skill of the trader — and more. The list goes on. When modeling a market or set of markets, you must burden the system with conservative cost assumptions at the outset before the parameter selection process begins. These higher costs will play a significant role in determining if a system has potential and what the optimal parameters are.

by Jesse Wolff