Trading Costs & Net Expected Value

A trade with positive gross EV can lose after implementation. Costs are not one generic percentage: each enters at a different point, and careless accounting can either omit it or subtract it twice.

Net formula #

For one filled share,

$$EV_{net}=q-p_{exec}-f-c_{capital}-c_{other}.$$

$p_{exec}$ is the actual execution price, including realized slippage from an intended price. $f$ contains applicable trading, maker/taker, settlement, and transfer fees. $c_{capital}$ is the opportunity or funding cost until resolution. Other costs must be explicitly defined.

The cost stack #

Numeric example #

At $q=0.65$ and $p_{exec}=0.60$, gross EV is 0.05. If fees are 0.01, capital cost 0.006, and other measured cost 0.008,

$$EV_{net}=0.65-0.60-0.01-0.006-0.008=0.026.$$

At $p=0.65$, zero gross edge becomes immediately negative after any positive cost.

Life example #

Buying a product for 60 and selling for an expected 65 is not a five-unit business margin if delivery, marketplace fees, returns, and warehouse time cost four.

Application to no-hedge #

Compute net EV on actual no-hedge fills. Keep slippage inside execution price, apply the correct liquidity-role fee, charge capital through expected resolution time, and measure adverse selection separately by post-fill reference movement and eventual outcomes.