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I have started a quant strategy that buys and sells thousands of stocks. Each trade represents <1% of average daily trading volume. On average, the trades represent around 0.1% of ADTV.

What is a reasonable expectation for slippage given how small the orders are? I measure slippage as fill price compared to the midpoint at the time the order was entered.

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    $\begingroup$ The best information you will find is buried in your own data. There are dozens of order types, venues, and execution algorithms that people use. Unless someone here executes the same way as you, in the same stocks, at the same time of day, etc., it will be quite difficult for anyone to give you a decent answer. $\endgroup$
    – amdopt
    Aug 15, 2023 at 18:55
  • $\begingroup$ could you point me towards some resources that would help me dissect my own data? $\endgroup$ Aug 15, 2023 at 19:37

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Slippage models usually take in predictors as the bid-ask spread (usually modeled as linear dependency) and the trade size relative to ADV (typically this is non linear dependency). You can mess around with adding dummy variables for stocks of certain features/industries if you believe that influences the average slippage.

I have not seen such models predict slippage to a high degree of accuracy in my experience, so don't expect probably an R-squared higher than 30%.

I would recommend running a cross sectional regression based on the above predictors to get started.

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    $\begingroup$ If I only use liquidity adding orders would that mean the slippage is no longer dependent on spread? $\endgroup$ Aug 15, 2023 at 20:09
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As mentioned in the comment it all depends on the type of the data you have. I am assuming you are sending market orders.

If you have only bar data there's no good way to approximate slippage. If it's a highly liquid instrument and your trading frequency is low you can just ignore it. You could just add some constant (1bps) to your transaction cost to check profitability of your strategy to account for slippage. If your size is large, you should not send market order in most of the cases, you would have to break down your order into smaller parts and send them as liquidity arrives (VWAP) or over time (TWAP).

If you have orderbook data you can use that to calculate slippage based on your order size (average price of the sum of levels that will be taken by your size).

If you want more complication you take use some market impact modules to account for the reaction of the market to your orders.

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