Slippage: The hidden cost of trading

Retail futures traders face additional risks beyond adverse stochastic price fluctuations in the markets in which they take a position. One such risk is that they must deal with uncertainty as to the price obtained when they enter or exit the market. Specifically, the transaction price they receive differs from the expected price regardless of whether they employ a limit or market order. Such a price 'surprise' is known as slippage. Precisely, slippage is the difference between the price a trader expects to receive and the price he or she actually receives when buying or selling a futures contract or option.; Slippage can only be measured from the orders placed between a retail trader and an associated person. This is because orders, jotted down on a paper ticket, are the only records of the trader's expectations at the time of the trade. Importantly, market orders have a time stamp which allows for the approximation of the futures asset price at the time of the trade. These orders are difficult to obtain because they form the paper trail required for audits by governing bodies within the industry and as such, are protected and not readily shared with the academic community. Academic research on slippage has been modest despite interest from retail traders because of a paucity of data that would enable study of the phenomenon. The data set generated for this study represents a robust sample of approximately sixteen thousand orders from approximately seventy traders over a period of roughly three years.; This research makes four contributions. First, I define slippage across different types of orders and markets. Second, I describe factors that are expected to affect slippage from which arise hypotheses. Third, I provide empirical estimates of slippage across a range of commodity futures contracts and futures options for both market and limit orders. Fourth, I test hypotheses concerning potential determinants of slippage for a set of orders given to associated persons from retail traders using the services of one introducing brokerage.