- Understanding how efficiency impacts your trading strategy
- Exploring broker-side options for enhancing efficiency
By quantifying how less-than-optimal order execution impacts your game plan, and identifying areas where your broker may be able to help, slippage can become a tolerable evil.
Understand Your Trading Strategy
A comprehensive trading plan is a beautiful thing. It provides the framework for addressing risk, trade selection, and money management as the market evolves. However, no matter how strong a strategy appears to be on paper, slippage can undermine your ability to generate consistent profits in the live market. Here are several reasons why this occurs:
- Liquidity and volatility: A product’s depth-of-market and activity levels are always changing according to prevailing conditions. Trading during periods of limited liquidity or extreme volatility enhances the chance of sustaining loss due to slippage.
- Inefficient order types: Using market or stop-market orders for market entry and exit can be costly. Being filled at the “best available price” is often very different from the ideal price.
- Unrealistic profit matrix: Small profit targets and high trade frequencies magnify the impact of slippage on a strategy’s bottom line. Unless a trader takes measures to maximize efficiency, this type of strategy is destined to underperform.
- X-factors: Every market, exchange, and trading infrastructure is unique. Unseen issues such as data lag, inefficient order routing, and server performance can all produce undue system latency, enhancing slippage.
Market liquidity, risk vs. reward, and order type are three primary areas where slippage compromises many strong, advanced trading strategies. Nonetheless, by exercising a little due diligence and taking advantage of the services of a competent broker, you can achieve optimal order execution.
Broker-Side Remedies
Perhaps the greatest challenge regarding slippage is that many of its drivers are not within a trader’s control. Although advanced trading strategies can help minimize a perceived downside, securing the services of a reputable brokerage is also very important.
Futures brokers come in all shapes and sizes, from full-service to deep discount. The most suitable selection depends on your available resources and trade-related goals. If you’re planning on attacking the futures market with a strategy that’s especially sensitive to slippage cost, then working with the right broker is a must. Here are a few services that are de facto broker-side remedies:
- Direct market access (DMA): DMA greatly enhances fill quality and trade execution. Under DMA, your orders go directly to the exchange without first being routed through an intermediary.
- Order hosting: Often times, orders are held locally on the trader’s PC before being filled at market. This is known as client-side hosting. Server-side is the opposite ― orders rest at the exchange while awaiting execution.
- Automation: One way to greatly reduce latency and slippage is to automate your trading strategies. Automation incorporates trade selection, order placement, and trade management into one automatic function. In addition, automated strategies are often utilized via broker-furnished co-located servers, further increasing precision.
- Robust trading software: Advanced order types, bracket orders, and low latency charting software are strong ways to improve trade-related efficiency. Having a broker that supports the ideal platform for the execution of your advanced trading strategies is a must.
In the modern futures market, traders have access to a vast array of brokerage options. Features such as server-side order hosting, automation, and DMA are a few common ways a broker can help enhance your trading efficiency.
Putting Your Advanced Trading Strategies to Work
While it’s true that the cost of bad fills can be substantial if left unchecked, there’s good news: Slippage is manageable. By using adequate technology and a competent broker, you can dramatically reduce poor trade execution.
For more information on mitigating slippage from the broker side, check out a free consultation with a futures pro at StoneX.