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Latency and Slippage

Latency Definition

Latency refers to the time it takes for an order to be sent from the trader's machine to the exchange to be filled (can be thought of as general internet latency). Because the ScaleTrade algorithm isn't a high frequency trading algorithm, we won't be going in depth into the logistics behind latency. It is just a factor to be considered when trading regardless of using ScaleTrade or not and should be actively monitored should you be prone to unstable internet connections.

Slippage Definition

Slippage refers to the gap between the bid and ask price for a security. This range causes orders to be filled at a rate worse than optimal and often leads to a minor loss when the position is filled. Market orders are susceptible to slippage, as they focus on getting filled rather than filling at a good price. We will be discussing ways to limit slippage, the different approaches we will be offering, and how slippage affects our returns.

Limit Orders

A common tactic for mitigating slippage is through the use of limit orders (see Limit Order for definition). By placing limit orders under or at the underlying price, we can remove the gap between the bid and the ask that market orders will automatically lose. The trade-off is a fill for a limit order is never guaranteed, and hence may lead to some profitable trades not being placed. We leave the decision to use either market or limit orders up to the user, however, we will most likely include advanced order management techniques in future versions of the algorithm that will be available to all users.

Effects of Slippage

Slippage is a major issue for most high-frequency trading systems. Because ScaleTrade is a moderate frequency trading system (see Trading Frequency for more information), slippage is something we should consider as it does partially affect our returns. When testing the algorithm, we assumed 1-2 ticks of slippage in our research as a reasonable threshold for entering fills. Since ScaleTrade only recommends high volatility, large-cap securities, the bid/ask spread is usually within 1-2 ticks. TradingView offers capabilities to try out different thresholds of slippage so should users want to test out different theories, they have the ability to do so.