Market Transaction Costs Have Spiked Recently, Indicating Larger Price Swings Could Be In Store

The latest data from Credit Suisse indicates that volatility could continue to be a key theme in financial markets. According to Credit Suisse analyst Ana Avramovic, transaction costs and investor fears have been on the rise recently.

Not only is the Credit Suisse Fear Barometer Index elevated, market “fragility” is also currently higher than normal. Credit Suisse uses its Transaction Cost Index as a measure of fragility. The Transaction Cost Index incorporates shortfall costs from trade data that is adjusted for trade characteristics such as aggression/size and market conditions like volatility.

The recent rise in market transaction costs indicates that there is little depth in the market these days.
“With less depth, a comparable order will have to go through several layers of the book to complete, resulting in larger impact and, potentially, larger price swings,” Avramovic explains.

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She notes, however, that elevated CSFB and Transaction Cost Indices don’t always guarantee a violent selloff.

The S&P 500 started the year with one of the most volatile year-opening sell-offs in history, but it has since rebounded to its highest point of the year. The SPDR S&P 500 ETF Trust SPY is now up 2.0 percent year-to-date, but traders are worried about the potential impact of a weak Q1 earnings season.

Disclosure: the author holds no position in the stocks mentioned.