A Quick Guide To Performing A Slippage and Liquidity Analysis

Conducting a slippage and liquidity analysis should be an important addition to every manager’s to-do list. Yet, from our experience, many find it hard to get started, particularly as they’re not sure how it should be done and what results it should generate. 

Well, we’re here to help!


The Problem: Small Costs With a Mighty Setback

Slippage costs often give managers the slip because they are, individually, rather small. In fact, they sometimes amount to nothing more than a few basis points of the price of the security being bought or sold.

Nevertheless, as we explored in our Slippage Costs – What Are They And How Do They Occur? blog post, just 0.05% negative slippage per day can add up to 11.8% compound cost over 252 days – so they’re certainly not something that should be ignored. 


How Most Managers Do It

Indeed, this is something that managers are starting to realise, but with limited resources and too many tasks on their plate, most of them run an End of Day (EOD) slippage and liquidity analysis.

This, however, only provides them with generic information about an aggregated value for all their securities over the day, without any intra-day details. In other words, they know how much money they’re losing, but they don’t know the details with the granularity needed.


Top Tips For Your Slippage And Liquidity Analysis

In fact, we’ve discovered through our experience, is that to make your slippage and liquidity analysis better, you’ll need to break your slippage costs down

Why? Because this helps you monitor each security trade according to the market liquidity at the moment of execution. In turn, this explains how certain occurrences impact the market – sometimes in just minutes, seconds, or even milliseconds.

So, by looking at each trade or purchase individually, you can see:

  • whether you’ve incurred a slippage cost;
  • how much that slippage cost was; and
  • what factors resulted in that slippage cost.

In turn, this gives you insight into how trading trends affect the market price of certain securities; information that you can then use to plan your strategy for the future. In other words, this will give the costs from slippage meaning, rather than leaving them as random expenses.


Final thoughts on Slippage and Liquidity Analysis

When taking on such an analysis, it’s important to decide what you’d like to get out of it

From our point of view, the best end result would be information we can arm ourselves with in the future… So, while we can’t get the money we’ve lost on slippage back and we can never fully avoid slippage costs, we can give ourselves a better fighting chance next time

Even so, there is no denying that such analyses take up precious time and resources. That’s why, in our next blog post, we’ll look at how some software is making light work of this arduous process.