【COMP226 LEC2.5 2.6】

LEC 2.5

Slippage

>> Definition: The slippage of a trade is the difference between the actual (average) execution price and expected execution price (also known as the "trigger" price)

     滑差：实际交易价和预期价的差

( review: • Limit orders guarantee price but not execution

• Market orders guarantee execution (almost always) but not price

• For market orders, slippage is an important consideration.  )

• With market orders 市场订购单, slippage is a crucial consideration and could be arbitrarily bad  就是可以差的没有下限

• With limit orders your worst-case price is guaranteed, but you may not execute at all  最低价格可以保障 

• For a market order the expected execution price can be calculated if one knows the current state of the order book.

For example, for a small enough buy order, it would be the best ask; for a larger order, it may be an average over multiple price levels.

When does one incur slippage?

>> The state of the order book changes between when the order is placed and when it reaches the market; and/or

>> One didn't have accurate enough data to compute an accurate execution price

LEC 2.6

Market makers

• Ongoing liquidity providers 流通量提供者 that post bids and asks

• Try to capture bid-ask spread 发觉买卖差价: try to repeatedly buy at the bid and sell at the (higher) ask

• Today market makers are normally high-frequency trading (HFT) algorithms (often referred to simply as "high-frequency traders") 

• Existence of market makers normally ensures a reasonably tight spread, however, there is evidence that HFT high-frequency traders abandon the market during times of market stress

• We will in the next set of slides of how HFT can be predatory, and is thus controversial

Toxic order flow

• An important problem faced by a market maker (MM) is avoiding toxic order flow

• Toxic order flow comprises market orders from informed traders that precede price moves in the favor of the informed trader

• After transacting with toxic order flow, an MM will build up (positive or negative) inventory with a corresponding loss

• additionally with a large inventory the MM faces the inventory risk of a further unfavorable price move

• thus, MMs prefer to hold no inventory (positive or negative)

Market makers and HFT

Today market makers are typically extremely high-frequency algorithmic traders

• The practice of High-Frequency Trading (HFT) is somewhat controversial because:

    • as we will see in the next set of slides  HFT traders can exploit their speed, potentially at the expense of other traders

​​​​​​​正如我们将在下一组幻灯片中看到的那样，高频交易交易者可以利用他们的速度，可能以牺牲其他交易者的利益为代价

    • there is some evidence that HFT traders leave the market during times of stress, which is exactly when liquidity provision is most needed

有证据表明，高频交易交易者在市场压力大的时候离开市场，而这恰恰是最需要流动性的时候