Bid-Offer Spread
Bid-offer spread measures the difference between the buy and sell prices.
The larger the difference between the prices, the more the market has to move to make a position profitable.
When the spread is zero, this is referred to as a choice price.
This is the simplest metric to compare between brokers and liquidity providers.
The bid/offer spread essentially represents liquidity.
Liquidity is the degree to which an asset can be quickly bought or sold on a marketplace at stable prices.
A narrower spread implies a deeper market where there is enough order volume for buyers and sellers to trade without causing a large price change.
This contrasts with a weak or thin liquidity environment, where large orders tend to move price, increase execution costs, and deter traders, which in turn causes a further decline in liquidity.
An important driver of liquidity is the rate of change in prices.
In times of extreme price volatility, spreads tend to widen and brokers' ability to execute large orders is reduced.
Fill Ratio
Fill ratio measures the number of successfully filled orders as a fraction of the total number of orders placed, usually stated as a percentage.
What good is a tight spread if you don’t get filled?
Rejected or unfilled orders represent an opportunity cost.
The trader must give up the opportunity to trade or attempt the trade again at a potentially worse price.
This means that higher fill ratios are desirable.
The higher the fill ratio, the better, because a rejection normally results in either a missed opportunity or execution at a worse price if the order is resubmitted to the same or a different venue.
For a quoted price stream from a single liquidity provider, the fill ratio should measure whether the deal was done at the agreed price or not.
Basically, was the order filled or rejected (or requoted)?
Rejects, aside from errors, are due to insufficient liquidity to match the trader's order.
Hold Time
Hold time is a discretionary delay between order reception and execution.
Hold time measures the discretionary element of execution latency, which is the time observed by the trader between placing an order and receiving notification of the fill or rejection.
Execution latency is the time taken between an order being transmitted from the trader's system and receiving a response.
Hold time is the common name for discretionary latency where execution of an inbound order is deliberately delayed while the liquidity provider decides whether to fill or reject it.
This period is also referred to as the last look window.
Discretionary latency is any extra time added while the order is held before the trade is executed.
Liquidity providers may apply or vary hold time based on their assessment of a customer's market impact, current market conditions, or their own appetite to trade in a given direction.
Higher hold times and execution latencies increase opportunity cost on both rejected and filled orders because, while waiting for a response, the trader is committed to the potential trade and may be unable to execute the rest of the strategy.
Market Impact
Market impact is the market reaction to a given set of trades.
Market impact describes the market's response, typically in terms of price changes, to a specific set of trades.
The interpretation of market impact is highly subjective.
One trader's strategy may try to minimize impact, while another may benefit from a strong and consistent post-trade reaction, but also suffer if that reaction occurs before related trades are completed.
Price Variation
Price variation is a trader's view of the difference between a desired or expected price and the actual execution price achieved by an order.
Price variation measures the difference between the price the trader expected and the price at which the order was filled, due to movements in the underlying market.
It is often referred to separately as slippage or price improvement for adverse and favorable outcomes respectively.
While attention is often focused on slippage when using market orders, traders should expect to experience both slippage and price improvement.
Traders using limit orders may have been conditioned to expect neither.
They may assume limit orders cannot slip, and many traders do not even consider measuring price improvement.
Price variation can be either:
Symmetrical: both price slippage and price improvement are passed to the customer without restriction. Asymmetrical: price improvement passed to the customer is limited, but price slippage is not. Ideally, symmetrical price variation should be demonstrated in both market and limit orders.
Liquidity providers may choose to fill every order at its limit price, even though fills on market orders indicate that a better price should be available some of the time.
This means that even limit orders should also experience price improvement.
Measuring slippage or price improvement requires information that may only be available in the trader's own logs.
We cannot rely on orders to carry the price that prompted the trade decision. Market orders do not carry a price at all, and the price on a limit order is not necessarily the same as the decision price.
This makes the metric both opaque and highly subjective.
Riskless Principal
A broker acts as a riskless principal if, at the customer's request, it purchases an asset from the market for its own account, records that trade in its own books, and then more or less immediately sells the same asset to the customer, either at the same price with a commission or at a markup without commission.
This means that are two transactions;
- One between the customer and the riskless principal (the broker)
- One transaction is between the riskless principal (broker) and the market (an external counterparty or liquidity provider).
A riskless principal is compensated in one of two ways:
- A markup between what it paid for the asset in the market and what it sold it for to the customer.
- A separate payment from the customer to the riskless principal that resembles a commission but is technically a fee.
한국어
Tiếng Việt
中文