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slippage (finance)
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slippage (finance)
please note:
- the content below is remote from Wikipedia
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{{Short description|Difference between estimated transaction costs and the amount actually paid}}{{About|the financial concept||Slippage (disambiguation){{!}}Slippage}}With regard to futures contracts as well as other financial instruments, slippage is the difference between where the computer signaled the entry and exit for a trade and where actual clients, with actual money, entered and exited the market using the computer's signals.WEB,weblink Measuring Slippage: Make it a Top Priority! â Automated Trading, 30 April 2014, Market impact, liquidity, and frictional costs may also contribute.Algorithmic trading is often used to reduce slippage, and algorithms can be backtested on past data to see the effects of slippage, but it is impossible to eliminate.WEB,weblink Slippage Definition, - the content below is remote from Wikipedia
- it has been imported raw for GetWiki
Measurement
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 between the execution price and the initial execution price.Example
{{Unreferenced section|date=May 2021}}(File:Slippage Example on the SPY ETF.png|thumb|Slippage Example on the SPY ETF)The associated image depicts the Level II (Market Depth) quotes of the SPY ETF (Exchange-Traded Fund) at a given instant in time.The left hand side of the image contains the market depth for the current BID prices and the right hand side of the image contains the market depth for the current ASK prices. Each side of the image contains three columns:- MM Name: the Market Maker name column
- Price: the "market depth" price
- Size: the number of shares at this price level (represented in hundreds). So, 2 actually means 200 shares.
- Buy 2800 @ $151.08
- Buy 1100 @ $151.08
- Buy 3800 @ $151.09
- Buy 900 @ $151.10
- Buy 3700 @ $151.11
- Buy 1200 @ $151.12
- Buy 3700 @ $151.13
- Buy 200 @ $151.14
- Buy 1000 @ $151.15
- Buy 400 @ $151.18
- Buy 100 @ $151.22
- Buy 600 @ $151.24
- Buy 500 @ $151.25 (only 500 shares out of the 2000 being offered at this price point are executed, because this will represent our entire 20,000 share order)
Reverse slippage
{{Unreferenced section|date=May 2021}}Reverse slippage, as described by Taleb, occurs when the purchase of a large position is done at increasing prices, so that the mark to market value of the position increases. The danger occurs when the trader attempts to exit their position. If the trader manages to create a squeeze large enough then this phenomenon can be profitable. This can also be considered a type of market making.Further reading
- BOOK, Taleb, Nassim Nicolas, Dynamic Hedging: Managing Vanilla and Exotic Options, John Wiley & Sons, New York, 1997, 978-0-471-15280-4,
- BOOK, John L. Knight, Stephen Satchell, Forecasting Volatility in the Financial Markets, Butterworth-Heinemann, 2003, 978-0-7506-5515-6,
See also
{{Wiktionary|slippage}}References
{{stock market|state=collapsed}}{{derivatives market|state=collapsed}}- content above as imported from Wikipedia
- "slippage (finance)" does not exist on GetWiki (yet)
- time: 6:12pm EDT - Wed, May 01 2024
- "slippage (finance)" does not exist on GetWiki (yet)
- time: 6:12pm EDT - Wed, May 01 2024
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