Pair Trading > Technical Details

Comissions, short selling, general costs

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Javier Perez:
Hello, first of all congratulations you are running a very interesting project!. I would like to know some details about pairs trading costs on ETFs:

-So, short selling implies paying comission/interests for borrowing the stocks right?. How do you calculate this? 

-I have seen that each ETF has an expense ratio. Does it affect to the strategy?

Overall can you explain all the costs of pairs trading maybe with an example I think it could be very helpful for newbies as me  :). Thanks!

admin:
Dear Javier,

thanks for your compliments! Now, to your questions:

--- Quote ---So, short selling implies paying comission/interests for borrowing the stocks right?. How do you calculate this? 
--- End quote ---
Yes, it does. At this moment, you have to check with Interactive Brokers via TWS or via their website (like in this video: https://www.youtube.com/watch?v=0Ulkeh6jbgU).

We plan to indicate number of shares and fee rates directly in PTL Trader.

--- Quote ---I have seen that each ETF has an expense ratio. Does it affect to the strategy?
--- End quote ---
It does of course, it is good if you check what are current costs of your ETF position. You could use http://www.etf.com/ website for instance.


--- Quote ---Overall can you explain all the costs of pairs trading maybe with an example I think it could be very helpful for newbies as me
--- End quote ---

Short interest rates and expense ratio is charged to all short ETF positions you have. Fortunately, if you trade with Interactive Brokers and avoid low-liquidity and hard-to-borrow ETFs, these costs will represent only small fraction of your total costs, which are your regular commissions you pay for any trade with stocks/ETFs anyway.

For instance, QQQ has expense ratio of 0.2% (http://www.etf.com/QQQ). See the attached screenshot to see current short fee rates, which fluctuates between 0.5% and 0.9%.
So if you held a short position of QQQ for the whole year, you paid something like 0.9% in total, which is very acceptable I think.

Just avoid trading hard-to-borrow stocks/ETFs and you don't need to pay too much attention to this.

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