Wow. Not 2.5% of the entire day, but just of 15 the busiest 15 minutes. About 1/5 of my trades are for 5% or more of the daily volume so I’d be a wild man in the eyes of that PM.
For part of 2013 I kept a record of slippage for about 335 trades. Most of the trades were in 10k-20k range with a few being as small as 5k and some winners had trade exits at 30k. On average my trades were 3.1% of the daily volume. But 65 trades (about 1/5 of my trades) were for more than 5% of the daily volume. This includes 17 trades for more than 10% of the daily volume and 8 trades for more than 20%. I didn’t plan to buy a high percentage of the daily volume, but when selling, I had no choice even if the volume had dried up.
What did I learn?
.1. For individual trades, results were all over the map.
…1a… I think there is a lot of truth to the guys who cited the Heisenberg Uncertainty Principle. You can never predict what your order will do to the price.
…1b… For example, one of the trades for 20% of the volume for a stock did not move the price a penny. That happened in June 2013 when I placed an order to trade $18,000 of DAVE which ended up trading $98,000 for the day. And 4 of the 17 trades for at least 10% of the daily volume didn’t move the price a penny. For nearly 1/4 of the time, trading over 10% of the volume had no effect on price!
…1c… On the other hand, there were times when my trade appeared to move the price significantly even though the order was for much less than 1% of the daily volume. For example, an order for $14,000 of JMBA apparently moved the price 1.5% (ouch) even though that $14,000 order represented less than 1 percent of the day’s trading volume. Similarly when trading LLEN I ended up seeing the price move by 1.6% (Ouch again) even though my $17,000 trade was less than 1 percent of the trading volume.
…1d… Needless to say, I’ve learned my lesson – always use limit orders – even if the trade will be less than 1% of the day’s trading volume.
.2. The second thing I learned is that paying attention to the Bid Ask spread is FAR MORE IMPORTANT than moving the prices – at least for my size of trades. In addition to how much my trades moved the prices, I kept a record of the average bid-ask spreads just before and after the trades.
…2a… The bid ask spread, on average for the 335 trades, contributed 0.21% of slippage per trade, but the movement of prices contributed, on average, just 0.09% of slippage. So over 2/3rds of the slippage for the trades was due to the bid-ask spread.
…2b… What about the 17 trades that were over 10% of the daily volume? These trades moved the price by 0.23% on average but the slippage due to the bid-ask spread was 0.40%. Here again, the bid-ask spread accounted for nearly 2/3 of the total slippage of 0.63%.
…2c… I think it is important to observe that those 17 trades had worse than average spreads (0.40% vs 0.23%) AND worse than average price impact (0.21% vs 0.09%). The two problems appeared to go together. Since the two problems often go hand in hand, I find a large bid-ask spread to be a caution sign, not only for itself, but also for the potential of moving prices.
Well, that’s my two cents of contribution to the discussion.
Oh, there are a couple methodological bias built into the above results. I was not doing an academic study so I did not attempt to remove biases arising from my trading method. For example, if I planned to buy 20k I usually start with a limit price at or below the ask price. If it filled below the ask, I’d record this as “negative” price movement. In order words, my trade did not move the price at all, but rather it “improved” the price. Including such price improvements will of course lower the average numbers for the price impact of large orders. Furthermore, if the limit order did not completely fill at or below the ask, I’d gradually increase the limit until it was as much as 1% above what the starting ask price was. But I would not go more than 1% above what the ask was when I first placed the order. As a result sometimes I’d only buy 1/2 or even 1/4 of my desired position. A by product of this method is that the price impact of larger trades will be underestimated to some degree compared to how much my trade would have moved the prices if I’d allowed the limit buy price to go above 1%. This bias only affected buying since when I was selling I’d keep on accepting lower prices even if the price was being pushed down more than 1% below the starting offer.
Regards,
Brian