Swing Pricing 101: A Closer Look at the Dealing Costs of Investment Funds Across the Globe

Abstract

The discussion on the relative merits of swing pricing and the details of its implementation has intensified in the past few years on both sides of the Atlantic. A properly constructed swing pricing mechanism hinges crucially on the estimated magnitude of the dealing costs associated with an investment fund’s net flows. This article offers an unbiased look at the competing measures of these costs and compares them across several investment categories and portfolio sizes. The evidence that the authors obtain from analyzing simulated investment portfolios suggests that a great deal of caution should be put in using commission and spread costs as the main measure of a fund’s dealing costs. Their bottom-up approach relies on a properly calibrated price impact model, and the presented results indicate that the true dealing costs can differ significantly from simple commission and spread cost measures across a range of fund sizes, daily net flows, and investment styles. The adage “it’s all about costs” should anchor the debate on swing pricing and how dealing costs are incorporated.