Can you explain to me why an index fund would pay less but a hedge fund would pay more? They are all buyers in the market, and index funds are more predictable, as they have to (roughly) adhere to their index. Once an index changes, they have a limited time to buy or sell. GE being kicked out of the Dow last week is a great example.
> Can you explain to me why an index fund would pay less but a hedge fund would pay more? They are all buyers in the market, and index funds are more predictable
And that's the reason. Market makers (and especially HFTs) profit from razor thin spreads on predictable orders, but they can lose money when they get hit by a big unpredictable order, so they avoid them and/or charge them more. A hedge fund's order is inherently dangerous to a market maker, because they have no idea before the fact if the hedge fund is just offloading 1k shares to rebalance their risk profile, or if they're liquidating their entire position, or taking a big short position. Hedge funds can change the entire market. Some guy calling up his broker and asking to sell his Apple shares won't.
So retail orders and index funds are safe, so they can be charged lower spreads. And because they're profitable, market makers compete for the volume, driving down prices. And the data supports this - prices paid by retail investors has crashed, and complaints from hedge funds and big active investors has spiked. :)
