A trading slippage analysis is nothing more than a slippage monitoring programme through which you can compare the price you wanted to sell or buy for with the one you actually sold or bought for. But for such a process to be successful, investors cannot look at slippage as a number in a vacuum. After all, knowing you paid x-amount more on a hundred securities doesn’t tell you much about why it happened and how it can be avoided.
That’s why such an analysis should be used as an opportunity to back-test our strategy for buying or selling specific securities at a particular time, on a specific date, for a particular price, and during specific circumstances. That explains where our expectations and reality diverged, helping us finetune our strategy for future purchases.
So, in other words, a good trading slippage analysis needs to track the price from order generation to execution by:
- Monitoring the market price and liquidity evolution during the lifecycle of an order;
- Grouping data from multiple accounts by period, instrument, asset class, or any other category of your choosing;
- Running the necessary calculations to identify slippage costs and strategy success; and
- Creating understandable reports in different levels of detail to be distributed amongst the team so that everyone can stay in the loop.
With this information accumulated through such an analysis, we can then attune our strategy for future events, allowing us to anticipate risks, manage slippage, and hopefully be more successful in our endeavours. But, of course, no human being can do that in an age when trades happen at lightning speed, which is why dedicated software is essential here.