You will log five paper trades and measure the gap between the price you saw and the price you would have paid.
Most investors never measure what their trades cost beyond the commission, because the other costs don't appear on any statement. This exercise makes them visible. You'll place five paper trades, meaning trades you write down but don't send, record what you saw and what you would have paid, and turn the result into one rule for how you place orders from now on. It becomes the trade-cost tab of your workbook.
Allow about thirty-five minutes, spread over at least one SGX session and one US session. Paper trades work because the costs you're measuring come from the order book, which you can read without trading.
Pick five different stocks or ETFs: at least one large SGX stock or ETF, at least one small SGX stock, and at least one large US stock. Then assign at least three order types across them, from the ones covered in lesson 5.2, Order types beyond limit and market, and when each helps: limit, market, closing-auction limit, or stop-limit.
Marcus chose his STI ETF, his local bank, Larkspur Precision, his S-REIT and his US chip designer. He used limit orders for three, a market order for Larkspur so he could see the cost of walking the book, and a limit order into the SGX closing auction for the REIT.
Create a tab called Trade costs, with one row per trade.
Date and time, stock, order type, side and quantity, decision price, bid, ask, depth at the best price, fill price, FX rate if foreign, trade value in SGD, cost against the midpoint in SGD and percent, slippage in SGD and percent, and a note
The decision price is the price at the moment you decided to trade, written before you look at the order screen. For an order you'd place overnight, it's the previous close. The fill price is what your order would actually have got: the ask for a buy limit at the ask, the average of the levels a market order walks through, or the official closing price for an auction order that would have matched.
Here are his made-up figures, so you can check your formulas before you add your own.
STI ETF: buy 1,300 units with a limit at the ask. Decision price S$3.80, bid S$3.79, ask S$3.80, fill S$3.80. Trade value S$4,940.
Bank: buy 100 shares with a limit at the ask. Decision price S$32.05 from earlier that morning, bid S$31.99, ask S$32.00, fill S$32.00. Trade value S$3,200.
Larkspur: buy 5,000 shares at market. Decision price S$1.60, bid S$1.59, ask S$1.61 with only 4,000 shares at that level, so the order would take 4,000 at S$1.61 and 1,000 at S$1.62. Fill averages about S$1.612. Trade value S$8,060.
S-REIT: buy 2,000 units with a limit of S$2.01 sent into the closing auction. At the decision, bid S$1.99 and ask S$2.01, midpoint S$2.00. The closing auction matched at S$2.00. Trade value S$4,000.
US chip designer: buy 20 shares with a limit at the ask, placed after the US open. Decision price US$149.50, the previous close. Bid US$149.98, ask US$150.02, fill US$150.02. At a rate of S$1.25 per US dollar, trade value about S$3,750.50.
Cost against the midpoint is the fill price minus the midpoint between bid and ask, times quantity, in SGD. It measures what the spread and any impact cost you at the moment of the trade.
Slippage is the fill price minus the decision price, times quantity, in SGD. It adds anything the price did between your decision and the fill.
For Marcus, the cost against the midpoint came to S$6.50 on the STI ETF, about 0.13%. The bank cost S$0.50, about 0.02%. Larkspur cost S$60, about 0.74%. The REIT cost nothing, because the auction matched at the midpoint. The US stock cost about S$0.50. The total was S$67.50, and almost 90% of it came from one trade.
Slippage told a different story. The bank had negative slippage of S$5, because the price had dipped since his morning decision. Larkspur's slippage was S$60, the same as its midpoint cost, because nothing moved in between. The US stock's slippage was S$13, about 0.35%, because the shares opened higher than the previous close, a cost that had nothing to do with the spread.
Add commissions from your broker's fee schedule in a separate column, and currency conversion costs for the US trade, which Investing in US and global markets from Singapore covers in lesson 2.1, Where the FX cost hides in a US trade.
Read down the rows and ask why each cheap trade was cheap and each expensive one wasn't. For Marcus the answers were plain. Large stocks and ETFs cost almost nothing with a limit at the ask. The market order in a thin stock cost more than all the others put together. The auction got the REIT the midpoint. And for the US stock, the stale decision price cost more than the spread.
He wrote his rule under the table: "Every order is a limit order. In any stock where my order is larger than the shares at the best price, or the spread is above 0.5%, I use the closing auction or split the order over several days. I set US limits after the open, from the live quote."
Five rows, five different stocks, at least three order types, every column filled, two cost totals in SGD, and one rule of no more than three sentences. If all five trades look free, check your fill prices: a buy limit below the ask wouldn't have filled, so it can't be counted as a cheap trade.
Now open your broker's screens, record five paper trades of your own, and write your rule underneath.
Build a trade-cost tab for five paper trades and write a one-line rule for how you will place orders from now on.
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