Round-Trip Cost: Converting Back Is Not Free
Every conversion has a return leg, and the return leg costs the same as the outbound one. What that does to short holding periods.
| recorded | |
|---|---|
| topic | swap |
| kept by | Lena Virtanen |
| length | 2 min read |
Entering a position and leaving it are two conversions. Most cost comparisons count one.
The arithmetic
At a one per cent all-in cost per conversion, a round trip costs two per cent. The asset has to rise two per cent before the position is level.
At a quarter per cent per leg, half a per cent. The difference between the two venues compounds across every round trip you make.
What this does to short holding periods
A position held for a day at a two per cent round trip cost needs a two per cent daily move to break even. Over a year of daily round trips, the costs dominate everything else by an enormous margin.
The frequency of conversion, not the size, is what makes this expensive.
The table worth internalising
| Round trip cost | Break-even move needed | Cost of 50 round trips |
|---|---|---|
| 0.4% | 0.4% | 20% |
| 1.0% | 1.0% | 50% |
| 2.0% | 2.0% | 100% |
The third column is why high-frequency retail conversion does not work.
The asymmetry people miss
The return leg is priced at whatever conditions exist when you return, not when you entered. A position entered in a calm hour and exited in a volatile one pays the quiet spread once and the wide spread once.
Planning the exit route matters as much as the entry, and it is almost never done.
What reduces it
Fewer conversions. This is the only lever that works reliably, and it is behavioural rather than technical.
After that: the order book instead of the instant screen on both legs, and a venue that prices the return as competitively as the entry. A venue with a published conversion schedule lets you check the second before committing to the first.
The measurement
Price both legs before entering. If the return quote is materially worse than the entry quote at the same size, that is information about the venue rather than about the market.
Venues that quote the swap rate and the fee as two numbers make that comparison a thirty second exercise. Collect & Exchange, where the quote holds for the whole amount, will quote both directions at size on request, which is the only way to know the round trip cost in advance.
Figures above are single observations, taken on the date shown. Spreads move with the book; treat these as a method you can repeat, not a price you can rely on.