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Chapter 09 — The Cost/Turnover Frontier
Status: drafting. Claim inventory: see README.md ch. 09.
This chapter is the cleanest result in the book: on an identical signal, the campaign moved net excess return from −3.21% to +2.13% purely by relieving turnover/cost pressure — changing the strategy's n_drop from 2 to 1. Signal metrics did not move; the outcome did. That is the definition of a binding cost constraint, and it sets the frontier every later improvement must operate on.
The result
Exp 26 ran the identical compact-stochastic reference signal through two construction variants (PROVEN → exp 26, EVIDENCE#015):
| Configuration | Gross | Net | MaxDD | IR | IC / RankIC |
|---|---|---|---|---|---|
| n_drop 2 (chases the drop) | +7.02% | −3.21% | — | — | identical |
| n_drop 1 (holds the dropped name) | +7.02% | +2.13% | −7.69% | 0.21 | identical |
The gross return and the signal metrics (IC/RankIC) are identical between the two rows — the entire ~5.3pp gap is cost. n_drop 2 means the strategy refuses to hold the top-ranked name and buys the next one down, so it chases in and out of the extreme winner every day; n_drop 1 holds it. Lower turnover, not a better signal, is what turned the book positive (PROVEN → exp 26).
Why cost is the binding constraint
Ch. 03 established the noise floor: on this signal, the gross→net collapse is ~9–10pp of cost drag at realistic assumptions (5bp open / 15bp close / $5 minimum) (PROVEN → exp 22–26 composite, EVIDENCE#011–015). Exp 26 then proved the direction of relief: cost is not a fixed tax you subtract, it is a construction decision. Turnover is the cost's driver, and turnover is chosen by the strategy — dropout rule, rebalance cadence, and order type.
The campaign's best net IR is 0.21 — a real but thin edge. Any addition that adds turnover faster than it adds gross return loses (the refuted runs of ch. 07 all added features that churned the book).
The frontier
The campaign's measured points on the frontier:
- n_drop 2 → 1: the reproduced win; holds the extreme winner, cuts daily churn
(PROVEN → exp 26, EVIDENCE#015). - Live round 3: turnover ≈ 0.74 at n_drop 1, invested $74,202.85, realized slippage 4.54 bps
(PROVEN → round 3, EVIDENCE#020). The live turnover is the first measured number the frontier can be calibrated against. - Untested relief levers (hypotheses from the desk's design notes, not yet isolated on the clean lake): weekly instead of daily rebalance; no-trade buffer bands (skip trades below a return-to-cost threshold); notional instead of qty orders at small sizes
(HYPOTHESIS → chat-ideas.md).
TODO(evidence-needed: weekly-rebalance and no-trade-band isolation runs on the exp-26 book — each would trade ~1pp of cost drag against ~1 day of signal decay)
The discipline the frontier imposes
Because the edge is thin and cost is the binding constraint, the acceptance contract for any change tightens: a candidate must beat the n_drop=1 reference on net IR and on IC/RankIC (ch. 07), and its turnover must not silently rise. The book treats turnover as a first-class metric to be reported with every run, not a tooling detail (PROVEN → exp 26 + round 3; the numbers to report are turnover, slippage bps, and cost as % of gross).
Practice note
Hold the winner. Prefer the lowest-turnover construction that preserves the ranking. Measure turnover and realized cost in every round; reconcile them against the backtest's 5bp/15bp/$5 model (ch. 11). The frontier is where this campaign's edge lives, and it is narrower than the backtest suggested.