Alpha Novae

A Blog Post

Slippages and price improvements with AlphaTrader

slippageTheoretically, if your broker is playing fair, slippages can be positive (at trader advantage) or negative (at trader disadvantage). But because of adverse selection, trend / momentum trading, and dealer manipulations, they tend to be quite asymmetrical with an important advantage to negative slippages. It is easy to understand this as traders tend to buy when prices rises.

When building  AlphaTrader, our algorithmic trading and execution specialized platform,  slippages are of course for us a great concern as we aim towards achieving “WYTIWIG”: “What You Trade Is What You Get”. And if slippage there is, it is of course better to get a positive one, meaning a price improvement

 

Let understand first the different cause of slippages:
–    Latency slippage: the market can move between the time you send your trade and the time it is executed. Latency slippage can be positive or negative.
–    Liquidity slippage: trading platform often displays top of the book bid/ask. If your order can not be filled with the liquidity available on the top, the execution will cascade the book and create slippage. Liquidity slippage can only be negative.
–    Last Look / Dealer Manipulations: dealers and liquidity providers on most ECN have the power of “last look”, which gives them the right to reject a trade or execute it with a requoted price, at trader disadvantage of course. Last look slippage can only be negative.

Latency slippages on market orders cannot be totally avoided of course but can be reduced to a minimum thanks to a good network connectivity with a geographical collocation and a low latency trading platform such as AlphaTrader. For example, with a price to trade latency of 5 ms (time between the price is generated on the exchange and associated trade generated by AlphaTrader is executed)  when trading on the LMAX Exchange, the market is unlikely to move in this period of time, except during extremely high volatility event.

But be cautious. A lot of execution providers (brokerages, platforms, etc) will announce you latency of a few milliseconds or less. But they only measure their ping connectivity to their liquidity providers. They do not measure end-to-end execution latency, meaning time it takes from the client terminal (and not from their servers) to execute the trade. You get slow down in the network, in the broker server queue, during risk checks, etc.
And to avoid slippage, even end-to-end execution latency is not a good indicator enough. What really has a meaning is price to trade latency: time it takes from a liquidity provider to submit a quote to the reception of this quote in your client trading terminal and the execution of the trade generated. Indeed you can be very fast and firing your trades and get them executed, but if the quote you received was too old by the time you receive it, you will be executed with latency slippages.

Last-look slippages can not be avoided by a client side application as it is a structural unfair advantage given to liquidity providers on most ECNs. So it is up to the trader choosing carefully its execution venue. That is at Alpha Novae we partnered with and connected AlphaTrader to the LMAX Exchange, being the first Exchange/MTF where it is possible to trade spot Forex, commodities and CFD with no last-look.

On the other hand, Liquidity slippages will of course depend of the size of your orders and will affect market and stop orders.

See below a widget from LMAX Exchange showing in real time the liquidity slippage you can get depending your order size:

It is easy to avoid liquidity slippages with AlphaTrader thanks to our Sniping tactics that you can apply to both manual and automated trading orders. The algorithm, particularly useful for scalpers, will automatically cancel any part of your order which could not be executed on the top of the book… or at the price you ask (if you also want to avoid latency slippage).

On AlphaTrader environment connected to LMAX Exchange, limit orders can not have liquidity, latency or last-look slippages as they are part of the book, but on the other hand they can be filled partially. On MT4, limit orders, being stored server side and being transformed into market orders at right time, will have both latency and liquidity slippages.

However, with AlphaTrader connected to LMAX Exchange, it is also possible to get positive slippages (at the advantage of the trader) on your limit orders. Why? Because of an advantage given to the traders of the exchange against liquidity providers. If liquidity providers “jump” your limit orders, you will be executed at the new best liquidity provider quote (instead of your price) and you will consequently get a price improvement. On the other hand, if you send a limit orders and jump yourself the liquidity provider best quote (at your disadvantage), you will be executed at liquidity provider price, meaning still at your advantage.

Good news is that with AlphaTrader we measure and register latency and slippages for all trades, bringing transparency in your executions, and consequently empowering you to compare production environment set ups, brokerage, venue performances and execution algorithms.

tradeHistoryLatency

Below are some statistics measured (in march 2014) on a sample of AlphaTrader  limit live orders at LMAX Exchange.

– On 543 trades EURUSD Limit.
-> Average size: 23.2 lots LMAX
-> Average positive slippage (good for trader) per trade : 0.09 pip / 0.1 point.
-> Max positive slippage: 23.1 pip. Min: 0 pip.

– On 210  trades Gold (XAUUSD) Limit.
-> Average size: 38.6 lots LMAX
-> Average positive slippage (good for trader) per trade : 0.2 pip / 2 point.
-> Max positive slippage: 3.8 pip. Min: 0 pip.

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