Dimensional’s approach to trading seeks to reduce implementation costs by participating in the natural trading that occurs in markets each day. “Blending in” requires expertise in pricing, sizing, timing, and routing orders. As markets and technology evolve, we continually conduct rigorous research on different aspects of market microstructure in order to improve our trading algorithms.
One important aspect of market microstructure is venue selection. US-listed securities can be traded on many different venues. As exchanges compete for trading activity, one point of differentiation across exchanges is how they charge fees and provide rebates. Some exchanges, termed “maker-taker” exchanges, charge fees for taking liquidity and offer rebates for providing liquidity. “Inverted” exchanges do the reverse, charging fees for providing liquidity and offering rebates for taking liquidity. Based on fees and rebates alone, it would seem that investors who provide liquidity should prefer maker-taker exchanges.
Total trade costs, however, tell a different story. In a new study, Marco Di Maggio of Harvard Business School, Dimensional Researchers Jerry Liu and Savina Rizova, and Dimensional’s Global Head of Equity Trading, Ryan Wiley, look at actual trades executed by Dimensional. They find that total trading costs, which consider fees, rebates, spreads, and market impact, are statistically indistinguishable across different types of venues. The implication is that orders can be routed across different venues without the unnecessary constraints that might result if decisions were based on an incomplete picture of trading costs.
This research shows that it is important to thoroughly study market microstructure in order to make well-informed decisions on how to price, size, update, and route orders across different markets around the globe. Having thoughtfully crafted trading algorithms that take those considerations into account and avoid unnecessary constraints is just one example of how we seek to capture every potential basis point for our clients.