The cost associated with trading securities can have a non-negligible impact on portfolio return. Trading costs include the following: Explicit costs - commissions, fees, and taxes. Market maker spread - difference between the bid and ask prices that the specialist sets for a stock; the specialist keeps the difference as compensation for providing immediacy. For less liquid stocks, the specialist has greater exposure to adverse price movements and likely will make the spread larger. Market impact - results when high volume trades influence the market price. Market impact can be broken into two components - a temporary one and a permanent one. The temporary component is due to the need for liquidity to fill the order. The permanent impact is due to the change in the market's perception of the security as a result of the block trade. Opportunity cost - the effective cost of price movements that occur before the trade executes. NYSE specialists sometimes may appear to have a mon...