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Slippage Study

  • #1
  • First Post: Oct 22, 2007 5:45pm Oct 22, 2007 5:45pm
Hello everyone.

I am restarting this thread in the broker section.

I'd like to find out your experiences with ECN slippage with Market orders.

Some say that Market order trading is foolish. What happens if your Limit order is not touched? How do you handle that?

Also, are you chunking large orders into small ones? For example, if you want to open 5 lots long, would you open 5 1 lot orders long? Rumor has it that this should get your filled faster.

Thanks everyone,
Tom
  • #2
  • Oct 22, 2007 6:15pm Oct 22, 2007 6:15pm
I think a better way to enter the market immediatly is to use marketable limit-orders rather than market-orders. For example, say the ask-price is 1.4350 and you want to buy now at this price, you could enter a buy-limit order at 1.4351. This order will usually execute immediatly at 1.4350, but limits your slippage to 1 pip incase there is a sudden move just when you pressed the button.
  • #3
  • Oct 25, 2007 8:35am Oct 25, 2007 8:35am
Quoting tdion
Hello everyone.

I am restarting this thread in the broker section.

I'd like to find out your experiences with ECN slippage with Market orders.

Some say that Market order trading is foolish. What happens if your Limit order is not touched? How do you handle that?

Also, are you chunking large orders into small ones? For example, if you want to open 5 lots long, would you open 5 1 lot orders long? Rumor has it that this should get your filled faster.

Thanks everyone,
Tom
There are various factors that affect slippage; not only the speed of the matching/order handling system of the ECN, but also the processing speed of the trader's computer, the quality and speed of the connection through which the order is sent, and the geographic location of the trader relative to the execution server (traders in other countries sending their orders to execution servers in the US will always experience more latency than US-based traders, all other variables held constant). Many traders criticize the ECN for the latency, when other factors [like the ones above] are the likely culprit.

Trading with market orders is foolish. Every time we set up a new money manager, we make sure that they're not trading with market orders. Market orders expose you to wide slippage.

Breaking your order up in smaller portions shouldn't matter in terms of speed, unless you are executing a very large size relative to the available liquidity in the market; then you have to get creative or use order handling algorithms that manage the trade for you.
  • #4
  • Oct 25, 2007 8:40am Oct 25, 2007 8:40am
Quoting shrike
I think a better way to enter the market immediatly is to use marketable limit-orders rather than market-orders. For example, say the ask-price is 1.4350 and you want to buy now at this price, you could enter a buy-limit order at 1.4351. This order will usually execute immediatly at 1.4350, but limits your slippage to 1 pip incase there is a sudden move just when you pressed the button.
Agree 100%. In fact, the feature that you mentioned is something we had coded once about a year ago into a front end to trade on Currenex. It automatically sent buy orders at Ask + X pips of slippage and Sell orders at Bid - X pips of slippage. It also set an expiration parameter of T seconds after which the open, unfilled order would expire.

That's another important aspect of sending marketable limit orders: the expiration. That's why we prefer that our traders use a front end (or API) that sends Fill-or-Kill (FOK) limit orders. If the order is not filled immediately (or after a second), then it is cancelled. This provides speed to manual traders and also protects them from getting slipped. It also alows a trader to resend the order or send more orders at a faster rate without having to worry to cancel the open limit order.
  • #5
  • Oct 25, 2007 10:13am Oct 25, 2007 10:13am
Quoting dominicanosrus
Trading with market orders is foolish. Every time we set up a new money manager, we make sure that they're not trading with market orders. Market orders expose you to wide slippage.
Can you explain why you would be exposed to wide slippage and what your definition of "wide" is?

I can understand during times such as news but under normal conditions I've never had a problem using market orders.
  • #6
  • Oct 25, 2007 10:32am Oct 25, 2007 10:32am
Quoting bugscoe
Can you explain why you would be exposed to wide slippage and what your definition of "wide" is?

I can understand during times such as news but under normal conditions I've never had a problem using market orders.
bugscoe, just because you never had a problem in the past [outside of news], it doesn't mean that you won't have one in the future. I know that you may never have a problem using market orders, but there's always a possibility in the background of something going wrong. I look at it like a homeowner's insurance policy. I live in Miami, Florida and we get a good share of hurricanes every now and then. At the same time, we go through long multi-year periods without them. Nevertheless, I won't cancel my insurance policy when I think we'll have a hurricaneless season. In fact, it doesn't matter what I think. If a serious storm comes our way, the risk of destruction is huge. Why would I risk it?

The same thing holds true for trading. At any time, the market may gap while your order is in process causing you to get filled at a price that you never wanted. Why may the price gap outside of news time? There are various reasons: we get nuked, there's an outage causing some providers of liquidity to drop out of the ECN gapping the price and fills, etc., etc. Who the heck cares why. It's possible and I don't want to take the risk.
  • #7
  • Oct 25, 2007 3:17pm Oct 25, 2007 3:17pm
I understand your logic however not sure I completely agree.

What sort of trading are your traders involved in...scalpers, just a few a day, swing, etc?
  • #8
  • Last Post: Oct 25, 2007 3:57pm Oct 25, 2007 3:57pm
Quoting bugscoe
I understand your logic however not sure I completely agree.

What sort of trading are your traders involved in...scalpers, just a few a day, swing, etc?
To each his own. We like to be extra safe. We work with a wide variety of styles, since the overall program has to be diversified for the assets of an institution that funds the traders; from high frequency (low latency) trading to swings that can last a few days.
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