【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