Execution modeling
Slippage Is a Distribution, Not a Constant
A fixed basis-point haircut can be a useful baseline, but it cannot represent every order, regime, and level of urgency.
Working definition
Slippage is the difference between a decision or reference price and the realized execution price, produced by spread, timing, impact, queueing, and market movement.
01
The same order can have different costs
Liquidity changes by instrument, time of day, volatility, event proximity, participation rate, and side of trade. A constant haircut averages away the circumstances in which a strategy trades most aggressively. If the signal activates precisely when spreads widen, unconditional average slippage is biased in its favor.
The model should condition on information available at the order time and avoid using future volume or the completed bar to estimate a fill that supposedly occurred inside that bar.
02
Passive fills require queue logic
Touching a limit price does not prove the order filled. Queue position, displayed size, cancellations, partial fills, and adverse selection all matter. When detailed order-book data is unavailable, a conservative fill rule and a range of assumptions are more honest than automatic execution at the best price.
- Separate spread capture from subsequent price movement.
- Scale impact with order size and contemporaneous liquidity.
- Model latency between signal, order, and fill.
- Stress both average cost and bad-tail execution events.
03
Calibrate, then keep a margin
Historical fills can anchor the model, but a strategy is often backtested before equivalent live data exists. Use comparable instruments and execution styles, disclose the proxy, and retain a stress case above the calibration. A strategy that works only at the central estimate has little execution margin.
Practical takeaways
- Condition costs on liquidity, volatility, timing, and urgency.
- Do not infer passive fills from price touches alone.
- Avoid future volume and completed-bar leakage.
- Require performance to survive an adverse cost tail.
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