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Hidden cost vs. slippage
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Hidden cost vs. slippage

  #1 (permalink)
Elite Member
copenhagen, denmark
 
Futures Experience: Intermediate
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Hidden cost vs. slippage

Hi all
I have been testing an automated strategy for a while. The original setup was based on market orders however a few days ago I changed it to limit orders to get better entry prices and to eliminate slippage.
I found that apparently there is a hidden cost ( I use IB) of approx 0.2 ticks per trade ( I trade the 6E contract)– see attached screenshots.
A. I would assume that limit orders get filed at the limit price or not get filed at all, am I wrong ??.
B. Is this an IB only situation or are you seeing the same kind of slippage / Hidden cost with other brokerage firms as well ?.
Rgds
Michael

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Hidden cost vs. slippage-limit1.jpg   Hidden cost vs. slippage-limit2.jpg  
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  #3 (permalink)
Fortitudo et Honor
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mengelbrecht View Post
Hi all
I have been testing an automated strategy for a while. The original setup was based on market orders however a few days ago I changed it to limit orders to get better entry prices and to eliminate slippage.
I found that apparently there is a hidden cost ( I use IB) of approx 0.2 ticks per trade ( I trade the 6E contract)– see attached screenshots.
A. I would assume that limit orders get filed at the limit price or not get filed at all, am I wrong ??.
B. Is this an IB only situation or are you seeing the same kind of slippage / Hidden cost with other brokerage firms as well ?.
Rgds
Michael

You still get slippage with limit orders. I've discussed this at length in a couple of other threads, I'll search and provide a link.

The short version is that your limit order is maintained on a broker stop server. That limit order has a "trigger" or execution point where the broker sends the order to the exchange.

In a fast moving market, when price is moving at high velocity (i.e. a large order on shallow depth), the price is moving so quickly that by the time the broker issues the order to the exchange, it gets filled, but at a price that's been moved in the direction of the movement.

The advantage or disadvantage plays out in which side of the movement you place your limits.

If you're entering the market long, and price is above your order, then any momentum slippage will be a positive outcome.

If you're entering the market long and price is below your order, then any momentum slippage will be a negative outcome.

If you're exiting the market (on a long order) and price is below your order, then any momentum slippage will be positive.

If you're exiting the market (on a long order) and price is above your order, then any momentum slippage will be negative.


Placing your orders on the "leeward" side (above for a long/cover, below for short/sell), subjects you to negative momentum slippage, however, it's logically advantageous, because if price moves to your order and either doesn't fill or partially fills and moves the opposite direction, then that's a good thing (either you didn't enter long in a downtrend, or you didn't exit a short position and continue making profits).

Placing your orders on the "windward" side (below for a long/cover, above for short/sell) then you get any momentum slippage as a benefit, however, you endure the dreaded limit order gotchas (price is at your limit order and doesn't fill your order because you were late in the que, or doesn't fill your order completely)...and the effects when price moves away (either you didn't get all of your position filled on a winning entry or didn't get all of your position filled on a winning exit).

Obviously if you use the typical combination (windward for entries, leeward for exits) then the effects offset a little.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #4 (permalink)
Fortitudo et Honor
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Similarly, this is how your stop orders get "jumped" if the market gaps significantly during an open and close and your order was in the gap. The order was sitting at the brokers stop server and not issued to the execution destination. The new price opens at a price beyond or far away from your stop and the order is consequently "rejected" with most brokers.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #5 (permalink)
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Hi RM99
I appreciate your input.
What I am seeing at least in sim mode is that the fills seems to be consistently 0.2 ticks worse than the limit price L. Se the latest screenshots from a few minutes ago
I would assume that that based on your input that fills would be slightly better or worse than the limit price and potentially even out the difference over a number of trades.
Secondly IF the slippage is due to latency between IB’s computers and the exchange wouldn’t the price be executed in a whole tick number e.g. 1.4322 or 1.4323 and not as a percentage of a tick e.g. 1.43222 or 1.43232 ??
rgds
michael

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Hidden cost vs. slippage-limit3.jpg   Hidden cost vs. slippage-limit4.jpg  
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  #6 (permalink)
Fortitudo et Honor
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mengelbrecht View Post
Hi RM99
I appreciate your input.
What I am seeing at least in sim mode is that the fills seems to be consistently 0.2 ticks worse than the limit price L. Se the latest screenshots from a few minutes ago
I would assume that that based on your input that fills would be slightly better or worse than the limit price and potentially even out the difference over a number of trades.
Secondly IF the slippage is due to latency between IB’s computers and the exchange wouldn’t the price be executed in a whole tick number e.g. 1.4322 or 1.4323 and not as a percentage of a tick e.g. 1.43222 or 1.43232 ??
rgds
michael

As far as sim goes, whatever the results are, they're artificial. It depends on your settings on your platform. On mine, I can select to not assume the order was filled unless price moved above the order price. I think sim also has to make some assumptions about limit orders with positionsize greater than the smallest increment.

In essence.... if you're trying to trade a futures order that has a positionsize of 100, how does the simulation know for sure you would have gotten filled totally.

In the end, I wouldn't trust sim slippage calculations regardless of what the settings are, there's really no way to accurately guage it (especially with limit orders).

Now, live on the other hand, it's simply a matter of empirical data and experience.

I've traded live before and saw as much as 6 ticks of momentum slippage that I described above (on a limit order) during high velocity/high volume periods. I used to trade with a trading forum and the moderator would use a combination of the DOM to sniff out shallow points and the RSI to guage strength and MACD to guage trend and we'd all place orders for a couple of ticks. When it worked out as planned, my limit exits would usually see a few ticks of positive slippage (during short little market bursts).

Someone like Fat Tails has some techniques/methods for estimating slippage based off market analytics though, so he can at least point you in the right direction and get you in the same ballpark with respect to your slippage projections.

I just tend to ignore the sim version of slippage and provide my own factor. I usually force it in by adding it to commissions rather than the slippage section.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #7 (permalink)
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Thx RM99

Bottomline I need to go live to get a real feeling for the slippage on limit orders

rgds
michael

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  #8 (permalink)
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Your first screenshot in Post #1 shows the "Trade Price" (this is the cell under "Realized P&L") as 1.4222, so it seems that your order was filled at your limit price. IB seems to incorporate commission costs into the "Average Price". So, it is my understanding that the Average Price of 1.42222 has been adjusted from the actual fill in order to include the commission cost and is not a result of slippage.

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  #9 (permalink)
Fortitudo et Honor
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mengelbrecht View Post
Thx RM99

Bottomline I need to go live to get a real feeling for the slippage on limit orders

rgds
michael

Like I said, Fat Tails has some methods for estimating slippage based off CBOT market analytics and such. You might PM him. At least it'll give you a number to start from. (for market orders)


As far as momentum slippage on limit orders, again, it depends on which side of the price you place your orders.

For ATS guys it's hard to discern in replay what's attributable to platform and execution variance (between backtest/sim/live) and what's momentum slippage. I can look at my trade log and see what price the orders are generated and what price they're actually filled. But how often and to what extent you'll see "momentum" slippage on limit orders depends on how you place your orders, what time of the trading day...if you trade breakouts, etc.

I've planned a tick on each side (2 ticks roundtrip) and between platform lag/variance and limit order slippage, that seems to be about right.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #10 (permalink)
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Coastline View Post
Your first screenshot in Post #1 shows the "Trade Price" (this is the cell under "Realized P&L") as 1.4222, so it seems that your order was filled at your limit price. IB seems to incorporate commission costs into the "Average Price". So, it is my understanding that the Average Price of 1.42222 has been adjusted from the actual fill in order to include the commission cost and is not a result of slippage.


Hi Coastline
You are right this is however on TOP on std commission. At this point in Time; Trading the 6E contracts via IB looks like this. Comissions $4.94 per roundtrip + 0.2 ticks in hidden cost = $5 so total = $10 pr roundtrip + slippage as RM99 in mentioning.

rgds
Michael

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