How to Determine Position Size to Limit Slippage?

Discussion in 'Order Execution' started by mazotrade, Mar 14, 2004.

  1. Slippage has become a significant factor in my market equity order entries and exits. The specialists or market makers seem to see me coming from a mile away and ream me on market orders. I need some advice.

    First off, I'm a scalper. I buy on momentum, ride for a modest gain, then jump out before the stock turns south. It's simplistic, and has limitations, but it works for me.

    Naturally, I find I cannot place limit orders for sizeable amounts of shares without getting partial fills. A partial fill is fine on the entry, as it is a self-limiting way to measure the liquidity of that stock at that time. The way I see it, it's often best not to buy more shares than you can get on a limit order, so you don't get caught holding more than you can unload easily, assuming comparable liquidity.

    Exit limits are another matter. I don't want to get a partial fill on my exit if I desperately want to get out completely. So, I'd like to stay with market orders on my exits.

    I realize that I will incur slippage on any market order. Sometimes, when the stock is moving my way on the exit, I actually get positive slippage, which is gravy. But I notice that, even when I'm exiting a stock with positive momentum, more often than not I get negative slippage despite the fact that I've placed my market sell order at a lower price than the current ask. That's when I know the specialists are robbing me because my order is big and sticks out like a sore thumb.

    My question is simple: How do I determine how many shares to trade at market to keep slippage at REASONABLE levels on both entry and exit? How do I keep under the radar of the specialist? I use Trade Station, which has "peg" orders. Haven't tried this feature yet. Any comments?

    It seems obvious that slippage depends on volume and volatility or liquidity. I need to QUANTIFY these variables to detrmine the number of shares I should trade. Is there a formula? Is this subject the chapter of a book? Any useful links out there for this subject? I'd be grateful for any assistance. Thanks - John
  2. What's the average size trade (quantitiy or position)and how liquid are the stocks (volume per day ave)?

  3. Mazotrade....good question....Welcome to ET. I think if you trade the same instrument over and over you might discover how it trades....and what to expect....but I am curious if there is a way to quantify numbers to also recognize size....

    Michael B.

  4. John,

    I don't know if this will help - but here is a rule of thumb.

    Look at ECN time and sales. Take a rough average of the shares filled. Make sure you filter out some idiots who hit 100 shares at a time to make prints look running. Multiply that by:

    2 During hours of 9:30 - 10:00
    3 During hours of 10:00 - 11:30
    2 During 11:30 - 1:00
    3 Druing 1:00 and 3:00
    2.5 During 3:00 and 3:30
    3 During 3:30 - 4

    What you get should be a close enough number that you should be able to scalp fine.

    Also, what platform do you use for scalping?
  5. Jmartinez: I try to trade small caps with high volume.

    SitrusTrader: Thanks for the rule of thumb. I hadn't considered volatility vs time of day -- good point. I'll try your rule.

    Follow up question: Since the NASDAQ uses an electronic trading system with 300 market makers while the NYSE, uniquely among large global
    markets, uses specialists on the floor of the exchange to match buyers and sellers, can I get less slippage with NASDAQ since it's electronic? What's the difference between a market maker and a specialist? Thanks - John
  6. if you can't handle the slippage in a stock, that means that you're trading one with thinner layers than what you're comfortable with.

    strike the balance between volitility (price movement) and slippage.

    Higher the volatility=thin bands on level 2 (CEPH, FAST), the greater the slippage. Lower the volatility= large bands (SUNW), the lesser the slippage.

    the perfect stock is the one with the best of both worlds. large bands, high volume and high volatily. good luck finding it. until then, its always a balancing act.

  7. mgarc


    one cannot trade with real size without encountering slippage problems.

    that's why over i've switched to trading the indices (e-minis, SPYdrs, QQQs) a few years back. much cleaner executions.

    of course it's a different game altogether.
  8. ertrader1

    ertrader1 Guest

    stop using market orders and do limit orders, there is no slippage with limit orders, you may not get filled as much, but i dont know to what extent ur slippage cost you.
  9. ertrader1

    ertrader1 Guest

    I guess the really only way to limit slippage is to sell ur longs into a rally and cover your shorts into sell offs....this will allow for a better fill at market, HOWEVER........timing plays a HUGE role in this method.

    If i do any equitie trades i limit in most of the time and always market out.....sometimes i get slippage, but most of the time i get the next price printed......

    also, stocks that trade like IBM....and stocks with spreads , you got understand how they move or you could incure huge slippage.

    but i trade options more than its always limits on options.
  10. Boomer


    what kind of size can you do on the es without slippage? how many contracts can you get off in one lot? thanks....
    #10     Mar 17, 2004