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 they were filled, arising from movements in the underlying market prices.
It is often separately referred to as “slippage” or “price improvement” for adverse and favorable outcomes respectively.
While attention is often focused on slippage (execution at a worse-than-expected price) when using market orders, we should expect to experience both slippage and improvement.
Traders using limit orders may have been conditioned to expect neither.
They assume that limit orders cannot slip and many traders do not even consider measuring price improvement.
Price variation can be either:
- Symmetrical: both price slippage or price improvement are passed to the customer without restriction.
- Asymmetrical: the price improvement is passed to the customer is limited but price slippage isn’t.
Ideally, symmetrical price variation should be demonstrated in both market and limit orders.
LPs may choose to fill every order at its limit price, even though fills on market orders indicates that a better price should be available for some proportion of the time.
This means that even limit orders should also experience price improvement.
Measurement of slippage or improvement requires information that may only be available in the trader’s own logs.
We can not rely on orders to carry the price which prompted the decision to trade – market orders do not carry a price at all and the price on a limit order is not necessarily the same value as the decision price.
This makes this metric potentially both opaque and highly subjective.