Slippage
Encyclopedia
With regards to futures contract
s as well as other financial instruments, slippage is the difference between estimated transaction costs and the amount actually paid. Brokers
may not always be effective enough at executing orders. Market-impacted, liquidity, and frictional costs may also contribute. Algorithmic trading
is often used to reduce slippage.
says: "In statistical terms, I figure I have traded about 2 million contracts
, with an average profit of $70 per contract (after slippage of perhaps $20). This average is approximately 700 standard deviations away from randomness
".
value of the position increases. The danger occurs when the trader attempts to exit his position. If the trader manages to create a squeeze large enough then this phenomenon can be profitable.
of securities that is leveraged
with borrowed funds will encounter the slippage that comes with how the portfolio increase/decrease multiply.
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s as well as other financial instruments, slippage is the difference between estimated transaction costs and the amount actually paid. Brokers
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
may not always be effective enough at executing orders. Market-impacted, liquidity, and frictional costs may also contribute. Algorithmic trading
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
is often used to reduce slippage.
Using initial mid price
Nassim Nicholas Taleb (1997) defines slippage as the difference between the average execution price and the initial midpoint of the bid and the offer for a given quantity to be executed.Using initial execution price
Knight and Satchell mention a flow trader needs to consider the effect of executing a large order on the market and to adjust the bid-ask spread accordingly. They calculate the liquidity cost as the difference of the execution price and the initial execution price.Speculation
Victor NiederhofferVictor Niederhoffer
Victor Niederhoffer is a hedge fund manager, champion squash player, bestselling author and statistician.Victor Niderhoffer was born in Brooklyn to a Jewish family. His father, Arthur, graduated from Brooklyn Law School but went to work in the police. Victor’s mother, Elaine was a teacher....
says: "In statistical terms, I figure I have traded about 2 million contracts
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
, with an average profit of $70 per contract (after slippage of perhaps $20). This average is approximately 700 standard deviations away from randomness
Randomness
Randomness has somewhat differing meanings as used in various fields. It also has common meanings which are connected to the notion of predictability of events....
".
Reverse Slippage
Reverse slippage as described by Taleb occurs when the purchase of a large position is done at increasing prices, so that the mark to marketMark to market
Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value...
value of the position increases. The danger occurs when the trader attempts to exit his position. If the trader manages to create a squeeze large enough then this phenomenon can be profitable.
Leveraged portfolio
A portfolioPortfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
of securities that is leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
with borrowed funds will encounter the slippage that comes with how the portfolio increase/decrease multiply.
See also
- Behavioral financeBehavioral financeBehavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market...
- Equity investment
- Financial markets
- Day tradingDay tradingDay trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day...
- George SorosGeorge SorosGeorge Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...
- Jesse Lauriston LivermoreJesse Lauriston LivermoreJesse Lauriston Livermore , also known as the Boy Plunger and "Great Bear of Wall Street", was an early 20th century stock trader...
- Seasonal traders
- SpeculationSpeculationIn finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
- Speculative AttackSpeculative attackA speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...
- Stock market bubbleStock market bubbleA stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
- Tulip maniaTulip maniaTulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...