Slippage and Market Makers Flashcards
Slippage
The slippage of a trade is the difference between the actual (average) execution price and the expected execution price (trigger price).
Incurring Slippage
One incurs slippage because the state of the order book changes fast 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.
Expected Execution Price
The expected execution price can be calculated if one knows the current state of the order book.
Market Makers
A market maker is a financial institution, typically a brokerage firm or a specialised trading firm, that facilitates the buying and selling of financial instruments in a financial market.
They play a big role in maintaining liquidity and orderly trading in markets by quoting both buy and sell prices for a particular security.
Liquidity
Refers to the ease with which an asset can be bought or sold in the market without causing a significant impact on its price.
A market with high liquidity has a large number of participants, both buyers and sellers, and a substantial trading volume.
Features of Liquidity
Trading Volume
Market Depth
Ease of Order Execution
Price Impact
Trading Volume
High liquidity is often associated with a significant trading volume.
Market Depth
Refers to the quantity of buy and sell orders at various price levels in the order book
Ease Of Order Execution
Orders can be executed quickly and at or near the current market price.
Price Impact
The extent to which executing that trade affects the asset’s price.
Toxic Order Flow
Comprises market orders from informed traders precede price moves in the favour of the informed trader.
TOF typically involves large volumes of orders being placed to manipulate prices or mislead other market participants.
