Slippage and Execution Assumptions: Name the Benchmark

Specify what price is being beaten or missed

Slippage is often described as the difference between an expected price and an execution price, but expected is too vague for an auditable calculation. Possible benchmarks include the decision-time midpoint, the arrival-time best quote or a separately defined reference valuation. Each answers a different question. A comparison should name the benchmark, its timestamp and whether it was observable when the decision was made.

For a buy, paying above the benchmark is adverse shortfall; for a sell, receiving below it is adverse. Keep this sign convention consistent before adding costs across directions. Comparing buys to the ask and sells to the bid excludes the initial spread crossing relative to midpoint. Comparing both to midpoint includes it. Neither convention should then receive a second spread charge for the same effect.

Read a fictional order book

Consider an invented linear contract quoted in arbitrary price units, with a minimum increment of 0.25 and a multiplier of $10 per price unit. Its tick value is therefore $2.50. Assume the best bid is 100.00, four contracts are offered at 100.25 and a further two at 100.50. These specifications and quantities are wholly fictional and do not describe any actual listed contract or market observation.

A six-contract buy that consumes those offers has a quantity-weighted average price of 100.333333: four times 100.25 plus two times 100.50, divided by six. The average price need not lie on a tick even though each individual execution does. CME's Liquidity Tool methodology likewise accounts for additional book levels when the first level lacks the requested quantity, although its benchmark convention differs from the midpoint comparison below. This arithmetic assumes the displayed quantities remain available and the stated fills occur; a static illustration does not establish that an actual order would receive them.

Decompose the shortfall once

The initial midpoint is 100.125, halfway between 100.00 and 100.25. Relative to that midpoint, the six-contract buy costs approximately 0.208333 price units per contract more. Multiplying the exact difference by six and by the $10 multiplier gives $12.50. Relative to the initial ask of 100.25, the additional depth cost is $5.00. The benchmark choice changes the reported number.

The midpoint-to-ask component is $7.50: 0.125 times six times $10. Adding that to the $5.00 depth component reconciles to $12.50. Do not add another $7.50 spread allowance to the midpoint-based result, because it is already included. The reconciliation provides a useful check on a hypothetical cost budget without asserting that any component is an observed expense for a real account.

Order types exchange one uncertainty for another

CME's glossary explains that a limit order specifies an acceptable price and can remain on the book until execution, cancellation or expiry. A chart touching a limit does not establish that an order received a fill: available quantity, priority and the order's actual arrival matter. Avoid assigning every hypothetical limit order the most favourable touched price while ignoring instances where an equivalent live instruction might receive no execution at all.

CME's glossary also describes market orders with protection, which restrict execution to a defined price range and can leave an unfilled remainder resting as a limit order. Product and platform details require current documentation. The broader lesson is that urgency and price constraints affect completion. A price-controlled order is not automatically a completed order, while an urgent instruction does not establish a predetermined execution price.

Treat partial fills and delay explicitly

Suppose only the four contracts at 100.25 fill before the remaining quantity becomes unavailable. The completed quantity is four, not six, and its average is 100.25. The residual two contracts need a stated policy: cancellation, waiting or another permitted action. Assigning the unfilled quantity a later favourable price without a predeclared rule introduces information that was unavailable when the original order was submitted.

Separate decision delay, transmission delay and time waiting for execution. A slower instruction can encounter a different book, but the direction of that difference is not known in advance. A hypothetical analysis may apply explicit adverse allowances or alternative scenarios. It should not claim those allowances are empirical execution estimates unless the necessary timestamped observations and matching rules actually support that interpretation.

Do not convert reference data into fill evidence

An official closing reference can be valuable for a reproducible directional calculation without describing the order book available to a particular participant. A continuous series may additionally switch the underlying delivery month. Neither the publisher's authority nor a precise decimal value supplies order arrival time, executable size or contract-specific queue information. Those are different data requirements attached to a different research question.

If a comparison is deliberately limited to signal states and turnover proxies, preserve that limit. A separate hypothetical sizing and cost budget can show the effect of assumptions, but it does not upgrade the reference history into an execution record. Contract identity, trading session, multiplier, quantity and available price evidence must all be established before making a claim about a real instrument's potential fills.

Write assumptions that another reader can challenge

A compact execution specification names the benchmark, side, quantity, timing, permissible order type and treatment of incomplete orders. It then lists explicit fees separately from benchmark-relative shortfall. Include whether a spread component is already present and how currency conversion is handled. These details allow a reader to change one assumption and understand why the budget changes instead of guessing what an all-in number contains.

Finally, compare ordinary and more demanding hypothetical conditions without labelling either as a forecast. Smaller available depth, a longer delay or a wider spread can each expose a different dependency. The purpose is to show what must be true for an execution assumption to hold. Precision in the arithmetic is useful, but it should never be confused with certainty about the availability of the assumed transaction.

Source record

1. CME Group: Liquidity Tool Methodology and Order-Book Depth
2. CME Group Glossary: Market Order With Protection