Transaction Costs: The Silent Killer of Strategies
Gross returns are a fantasy. Spreads, slippage, and market impact quietly convert winning backtests into losing accounts. Costs are not a footnote to the test — they are the test.
Every strategy looks better on paper than in an account, and most of the difference has a single name: cost. Commissions, the bid–ask spread you cross, slippage between decision and fill, and the market impact of your own order all subtract from the gross number a backtest reports.
The gap between intended and realised performance is well studied — Pérold named it the implementation shortfall[1] — and the cost of trading scales with size and inverse liquidity in ways optimal-execution theory makes precise[2].
A strategy that only works gross of costs does not work.
Why frequency is the multiplier
Costs are paid per trade. A high-turnover approach — intraday or 0DTE — pays the spread over and over, and informed counterparties move the price against size[3]. The faster you trade, the larger the hurdle your raw edge must clear just to break even.
Niro models commissions and slippage in every figure, and its paper broker always crosses the spread — there is no cost-free fantasy mode. The number you see is the number you could have kept.
References
- Pérold, A. F. (1988). The Implementation Shortfall: Paper versus Reality. The Journal of Portfolio Management, 14(3).
- Almgren, R., & Chriss, N. (2000). Optimal Execution of Portfolio Transactions. Journal of Risk, 3(2).
- Kyle, A. S. (1985). Continuous Auctions and Insider Trading. Econometrica, 53(6).