Press Releases
March 24, 2009
SogoTrade President Discusses the Impact Of “Price Slippage” For Active Stock Trading
Low commissions mean a once small cost of stock trading becomes more important
New York – The dramatic reduction in stock commissions, like the $3 online trades SogoTrade (www.SogoTrade.com) offers, have made other marginal costs, which once seemed of little concern to non-professional traders, become more important. Recently, Dave Whitmore, president of SogoTrade, took the opportunity to discuss the biggest of these costs, price slippage, and how it affects the active trader.
What is price slippage?
Dave Whitmore: Price slippage is the difference in prices between the time an investor gets a signal or idea, makes a decision, places an order, and finally gets an execution of the trade. At each of these points the price of the stock can change, creating additional costs above the nominal cost of the commission. When commissions could be as high as a few hundred dollars, these costs—often only a few pennies a share—were insignificant. As commission rates have declined, the importance of slippage has risen as a trading cost.
What causes price slippage?
DW: A variety of factors ranging from how actively traded the stock is, to the bid/ask spread, to the speed of your brokerage’s order routing system. An actively traded stock means that it might be easier to get shares at the currently quoted price, but it also likely means that the price can change quickly. In that case the most important thing is how fast you can execute the trade. At SogoTrade, we’ve built one of the most robust trade execution backbones of any retail brokerage with direct pipelines to all the major trading venues. This means that once a trade gets to our system, it can often be completed in milliseconds, ensuring the best odds of getting the price the trader was expecting.
What is the bid/ask spread?
DW: The bid is the highest price at which other investors are already hoping to buy, and the ask is the lowest price at which other investors are offering stock for sale. The difference between these two prices is the spread. The “last trade” can occur at either of these prices, or in between. This difference used to be at least 1/8th of a dollar, by rule, but nowadays stocks are quoted in pennies and the proliferation of electronic exchanges has brought this down substantially. Most spreads are only a few cents, with the most actively traded, closer to one cent. But even if you were to buy and then instantly sell a stock, you would be losing whatever the spread was, even if the quote didn’t change,
How can I control price slippage costs?
DW: Make quick decisions and trade on a fast platform. Take the example of a trader who uses a signal—such as the price crossing the moving average—to enter a trade. The first slippage point is after the signal is generated; at that point the trader has only an idea and he needs to decide on an action. If he’s back-tested the strategy, he’s made an assumption about the entry price and how it’s related to the breakout price. The time that elapses from signal to decision opens the first window of slippage.
Next the trader needs to enter an order. If he chooses a market order, he may be filled higher or lower than the prevailing bid/ask; if he chooses a limit order he may miss the price he thinks is available and have to cancel and replace the order to get a fill. And finally, if there is some latency between his Internet connection, the broker’s order routing system, and the ultimate trading destination, another source of slippage creeps in. Then once the trader is in the position, he’ll have to use the same cycle of actions to liquidate when he decides to exit. Lastly, there is the matter of liquidity. If the trader is seeking a large number of shares compared to what is available at the quote, then filling the order may require taking not just the lowest offer price, but also offers that are above the current quote.
When an active trader recognizes and understands each of these interactions he also recognizes the importance of his brokerage’s technology in controlling his trading costs. Price slippage is never fully avoidable, but once you understand it, it becomes a part of doing business rather than an unexpected cost.
About SogoTrade
SogoTrade (http://www.SogoTrade.com) is the online retail division of Genesis Securities LLC. (http://www.gndt.com). SogoTrade offers advanced online trading and research tools, fast trade executions, and exceptional customer service. With $3.00 online trade commissions, SogoTrade empowers investors to participate in financial markets at a low cost.
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SogoTrade, a division of Genesis Securities LLC. Securities products and services are offered by Genesis Securities, member FINRA/SIPC.
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