Question 1

How do you estimate slippage before placing a market order?

Accepted Answer

By walking the order book. Take the side your order will consume (asks for a buy, bids for a sell), fill your size level by level from the best price outward, and compute the quantity-weighted average price you would pay. Slippage is the distance between that average and the mid price, expressed in basis points. Nothing else — not the spread, not the last trade, not a volatility model — measures what the order itself will do to the price.

Question 2

Why does leverage make slippage more expensive?

Accepted Answer

Because slippage is charged on the notional size of the position, while the trader only posts a fraction of it as margin. Ten basis points of slippage on a position opened at 10x leverage is one percent of the margin backing it, paid on entry and again on exit. The leverage multiplies the cost of the fill exactly as it multiplies the exposure.

Question 3

When should a trading system refuse to send a market order?

Accepted Answer

When the visible book cannot absorb it. Two rules cover most of the danger: reject if the total depth on the consumed side is below a floor, because a thin book cannot be trusted to hold its shape between the estimate and the fill, and reject if the order would consume more than a fixed fraction of that depth, because an order that large is not taking liquidity but moving the price. A system that cannot read the book at all should say so rather than substitute a guess.

One post tagged with "slippage"

How do you know what a market order will cost before you send it?