2.4 · Transaction costs2.40 bps large cap, 14.27 bps small cap

Quoted half-spreads, 112 names, three rounds, on the live feed. Median 1.91 bps; trade-weighted for what momentum actually buys, 2.40. The 1.5 bps default in the execution model was too low.

Three limits on what this proves, all stated because they cut the same way: these are quoted spreads, an upper bound on effective cost; they are today's spreads applied to a nine-year history, and spreads have generally narrowed; and the feed is delayed 15–20 minutes.

2.5 · CapacityThe self-defeating argument

The standard defence of a small account is that its edge lives where institutions cannot trade. Every failure above happened in mega-caps, so the argument had never been tested. We ran it on 110 small and mid caps at 23× lower dollar volume (median $39.8M/day against $919M).

The edge is smaller, drawdown far worse, Sharpe lower. And the costs settle it:

Institutions avoid these names because the trading costs are prohibitive. Those same costs apply to a $100k account. The friction that protects an anomaly from arbitrage also consumes it for you.

Applying the measured spread, the small-cap edge of +13.3 points becomes −73.5%.