Equity trading costs have fallen less than commonly thought. Evidence using alternative trading cost estimators

Equity trading costs have been argued to have fallen to extreme lows following the introduction of automated trading. The justification is a fall in estimates of spreads, such as closing and effective spreads. A spread is however measured conditional on an expected transaction size. If transaction sizes falls, spreads fall, without necessarily implying a lowering in trading costs. We argue that much of the fall in spreads is driven by the fall in transaction size following the automation of trading. Alternative estimators of transaction costs less sensitive to trade size, such as the the Lesmond, Ogden and Trzcinka (1999), Corwin and Schultz (2012) and Abdi and Ranaldo (2017) estimators, show much less of a downward trend. Using transaction by transaction data for the Norwegian equity market for the period 1999 to 2016, we show that the lowering of spreads is driven by the decline in order sizes.