Too many questions all at once. Let's try and take them apart, one at a time.
Assuming that the bulk of the October 2008 trading of the I Fund was more "institutional," vice participant-driven IFT activity, could that not affect the amount of the trading costs for that particular month? What other variables would affect the trading costs for a particular month for a particular fund?
First, there is no such thing as "institutional" trading activity in TSP. No institutions own shares in TSP. It is only individual share holders who own shares.
Now, put this in your mind as well. Barclays is the agent which executes trades into and out of actual shares of stock. Remember, the only time Barclays gets involved is when there are MORE sellers than buyers, or visa versa. Otherwise, it's all handled in-house. If there are more buyers than sellers, (or reverse), then an order is placed at 2:30 each day to Barclays.
Barclays has two choices. Choice 1- they can meet the demand within their OWN system. Barclays keeps a slush fund of cash and shares within Barclays to address demand. Under SEC rules, there is a three-day clearning time frame, so Barclays typically keeps somewhere on the order of one billion dollars in both stock shares and liquid cash. If the fund managers at Barclays decide they can fill the order from within their own holdings, they can do that.
Note: TSP has no "fund managers". TSP only has order takers, no assets, and computer processing people. Barclays holds the cash, and shares.
Choice 2- IF the amount of the order exceeds the ability of Barclays to cover in house, they have to go out on the open market and buy or sell shares to cover the amount of orders placed. In this case, there are micro-fees associated. By Micro, I mean that yes, there is a "handling charge" associated with the brokers who are doing the buying and selling. If the order is, say, "BUY 24 million dollars of S&P 500", then there is a broker's charge for the exchange. The amount is TINY compared to the actual volume traded. You or I could not get the kind of rates and fees that Barclays gets on doing a 24 million dollar trade.
IN the month shown above (October 2008), Barclays traded 2.3 BILLION dollars in the S&P 500 ("C" fund) . That was spread over roughly 23 trading days. (23 executions of trades). It cost them a grand total of 223 THOUSAND dollars to execute all those trades. That works out to $1 in trading costs, for each $10,620 of shares traded during the month.
If I had $106,200 in a C fund trade, it would have cost the TSP a total of $10 to execute that trade.
The entire amount of variable trading costs rest within how Barclays executes the order.
IF they cover in-house, there is no expense at all.
IF they have to go out on the open market, then there is a small fee associated.
There is one more varible involved- that is "time".
They have to declare a share value each day. That's a whole differnet discussion, which doesn't need to be done here. Suffice it to say that the TSP has chosen to declare a "value" at 4 pm. each day.
But the trades don't occur at exactly 4 pm. The trades occur in the time between when Barclays get the order at 2:30 each day, and the market closing at 4 pm.
The Barclays fund managers get to decide whether to do it at 2:35 pm, or 3:58 p.m. Let say today Barclays gets a "sell order" of 100 million shares.
Now, in a falling market day, the fund manager would be smart, and execute the trade at 2:35 pm. Let's say he is right, and the market falls another 1 percent between 2:35 p.m. and 4 p.m.
The stocks were sold when the values were one percent higher then they were at the close. So there is "extra money" all of a sudden.
So, what happens to that windfall money?
Some of it is paid out in bonuses:
http://www.independent.co.uk/news/b...us-review-as-bank-seeks-uae-cash-1002752.html
Some of it is retained in the slush fund, to offset days when the fund manager misses the mark.
That brings us around to something called "Tracking Error" - something I'll cover in a future post.
Sometimes tracking error is in favor of shareholders, sometimes its against share holders.
The I fund is slightly different. The value is declared at 4 pm. But the trades are not actually executed until overnight- when the foreign markets open up and trades are made. The last market to open is FSTE, which opens at about 6 am. eastern time the following morning. It's crapshoot, because FTRIB doesn't set the value at 7 am the next morning. If they did, that would eliminate 95% of the varible costs of the I fund trades. We suggested that in the filings we did during the comment period of the trading restrictions. They didn't listen to us.
The "I" fund MADE money in October, 2008, because the value was set at 4 pm, and,. on a couple of days, the markets tanked or rose more than the fund manager expected. It turned out to be in the favor of shareholders by $8 million dollars.
But it could have gone the other way.
But still, the amount is tiny- minescule, compared to other investment vehicles. The way Barclays handles the slush fund ensures that. Barclays is very, very good at handling that slush fund.
