Price improvement – eliminating negative slippage

Today we’re going to talk about price improvements or positive slippage. We’re all very well aware of negative slippage, but too often as a client we’re not benefitting from price improvements. On LMAX Exchange, or indeed on any central limited order book, it’s natural if you fire in a market order, that occasionally you’re going to miss that price, and get negative slippage, and other cases you get positive slippage. On LMAX Exchange last year, about 93% of market orders were filled at the price the client aimed for, 4.5% suffered from negative slippage and 2.5% benefited from price improvement. That shows a natural market bias where, the trend is your friend and clients in the market are generally moving in one direction, so unfortunately, there is always a bias towards negative slippage.


In our forthcoming whitepaper, we examine 6.7M trades, from other liquidity providers, other venues, as well as LMAX Exchange. And we expected to see the same behaviour for market orders, unfortunately we didn’t. The biggest thing we saw was that price improvement was capped, in that, sometimes you had negative slippage that ran into 4 or 5 pips, you’d expect the same to be true for price improvements or positive slippage, in fact, price improvement seems to be capped between 1 and 2 pips. But the ratio to be fair, between negative slippage and positive slippage was about the same at 2 to 1. So, what should you do if you trade? First of all, you can eliminate a lot of negative slippage by using limit orders, most professional traders use limit orders and normally they put a bit of tolerance in there so they accept some negative slippage, because really they want to pay 4 but what they’re saying is that they’ll pay up to 5, but they don’t want to pay 6, 7 or 8. So, I’ll send a limit order at 5 and hope that I get filled at 4, in this occasion, that 4 comes through as price improvement.

Unfortunately what we see on other LPs and other venues is that invariably the client is filled at 5, they never ever benefit from price improvement, they never get filled at 4. You need to look at the liquidity policy of the liquidity provider, and your venues, to see if the price improves by the time your order reaches them, will you be filled at a better price? On LMAX Exchange that always happens, we say price improvement as standard, our curve of positive slippage or price improvement is identical for market orders and limit orders. What does that add up to? Very simply, last year on limit orders, roughly 10% of all the trades on LMAX Exchange, price improvement equivalent to 2 million dollars, ended up in client accounts. If I extrapolate that across all orders on LMAX Exchange to include market orders, it adds up to 20 million dollars. If you’re not receiving price improvement today, you should ask your liquidity providers why, because it’s truly yours and it would be natural for you to get it – and if still the answer is zero, I suggest you come and talk to LMAX Exchange.

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