How Does Transaction Cost Affect the Frequency of Delta Hedging?

Transaction costs impose a penalty on frequent trading. A market maker must balance the risk reduction from re-hedging (lower gamma risk) against the cost of the trade (higher transaction costs and slippage).

Higher transaction costs lead to less frequent re-hedging, resulting in a wider 'neutral band' for delta, where the market maker accepts a greater degree of delta exposure before re-adjusting the hedge.