How Fees Eat an Edge
A strategy with a three-cent edge and a four-cent round-trip cost is a losing strategy. Working through where every cost lands and what survives.
The most common way a plausible idea fails is not that it was wrong. It is that it was right by less than it cost.
The full list of costs
Spread. Half on entry, half on exit, or the whole thing on a round trip. Usually the largest single item and the one that appears on no statement. What a spread costs you.
Explicit fees. Where charged. On venues with a variance-shaped fee, largest in the middle of the price range, which is where most trading happens. How Kalshi fees work.
Slippage. Whenever your size exceeds the top of book. Depth and slippage.
Capital cost. The return you forgo by committing capital for the contract's life. Capital lockup.
Transfer and network costs. Getting money in and out. Fixed per action, so they punish frequent small movements.
Execution shortfall. The difference between the price when you decided and the price when you traded.
A worked example
You believe a contract trading at 60 is worth 63. A three-cent edge, 5% on the position. It settles in three months.
The market is 58/62. You buy at 62 — you have already paid two cents against the mid, leaving one cent of edge against your own estimate.
Fees on entry: call it half a cent.
Remaining: half a cent of edge on a 62-cent position.
Now add the capital cost: 62 cents committed for three months. Whatever a quarter of a year of your alternative return is, subtract it. For most people that is more than half a cent.
The trade is negative before anything goes wrong, from a starting point of being right by three cents.
What this implies
Round-trip cost is the hurdle, not the fee. An edge must exceed the full cost of getting in and out, or of getting in and waiting.
Frequent trading is punished severely. A strategy trading twenty times a year at a four-cent round-trip cost needs eighty cents per contract per year of gross edge. That is an enormous requirement on a dollar-denominated instrument.
Holding to settlement is cheaper. No exit spread. For any position you were going to hold anyway, this is a genuine saving. Early exit versus holding.
Liquid markets dominate. The spread difference between a busy market and a quiet one is larger than any improvement cleverness can produce.
The cross-venue case
This is where the arithmetic bites hardest, because a cross-venue position pays every cost twice.
Two legs, two spreads, two fees, two lots of slippage, and capital on both sides for the full term. A six-cent headline gap routinely has nothing left after that, which is exactly why this site reports a theoretical cross-market edge — a measurement of what two prices imply — and never calls it a return.
What a gap is actually worth does the subtraction line by line.
The discipline
Before any trade, write down the gross edge and the full round-trip cost. If the second is larger than the first, there is no trade, however good the reasoning was.
Most ideas die here. That is the cost model doing its job, and it is far cheaper to find out on paper. Paper trading a signal.
Next
Capital lockup, the cost nobody bills you for.
Educational content only. Nothing here is financial advice, a solicitation, or an offer to trade. Prediction markets can move against you and a position can lose its entire value. Where this guide describes a difference between venues it describes a theoretical cross-market edge in observed prices, which is not a profit: fees, spreads, capital lockup, transfer time and differing settlement rules all come out of it first.
Keep reading
Risk and Costs · 3 min readCapital Lockup, the Cost Nobody Bills You ForMoney committed to an event contract earns nothing until settlement. On long-dated markets this cost dominates everything else and it appears on no statement.
Risk and Costs · 3 min readPosition Sizing When You Might Be WrongSizing determines survival more than selection does. The arithmetic of ruin, why fractional approaches exist, and why the book is the real constraint.
Risk and Costs · 3 min readThe Limits of Any Measured EdgeA measured price difference is a measurement. The distance between that and a return is made of costs, capacity, decay and the chance the measurement is wrong.
Prediction Market Basics · 4 min readHow an Event Contract Pays OutAn event contract settles at one dollar or nothing. Understanding that single fact explains pricing, profit, loss and most of the mistakes people make early on.