The implications of such behavior are then examined. In such cases, normative financial economics provides a base for positive financial economics. In the real world, this is rarely the case. Consider foreign exchange. The bid-ask spread represents the cost of transacting.
Financial institutions provide transactions services, broadly construed.
To do business, such an institution must find a way to arrange a set of trades more efficiently than can those with whom it does business. To compete effectively, an institution must also do this at least as efficiently as other institutions. Were there no transactions costs, there would be no financial institutions. Advances in communications, computation, and financial economics have greatly increased the competition among such institutions and provided accompanying decreases in transactions costs. One useful classification of paradigms used in financial economics identifies major types, based on the treatment of time and outcomes .