Most investors obsess over signal design, factor timing, and portfolio construction. But a hidden driver of performance lurks in the background: execution. Slippage, market impact, and latency may not show up in a backtest—but in live trading, they carve away at returns like compound interest in reverse.
1) Slippage is death by a thousand cuts
Every order walks a line between speed and cost. Cross the spread too often and your alpha bleeds. Wait too long, and opportunity slips away. Slippage compounds quietly until it consumes entire signals.
2) Market impact is predictable—but ignored
Large orders move markets. Yet many models assume frictionless fills. Ignoring market impact is like pretending gravity doesn’t exist. Impact models exist—use them, or risk erasing half your forecasted returns.
3) Latency is the silent killer
Milliseconds matter. In fragmented, electronic markets, latency arbitrage eats the slow. Even long-horizon investors feel it when delayed trades cause slippage in volatile names.
4) If you can’t measure it, you can’t fix it
Execution quality must be measured with as much rigor as signal performance. Transaction cost analysis (TCA) is no longer optional—it’s survival.
Blueprint for better execution
- Integrate TCA dashboards alongside performance attribution.
- Calibrate order sizing to market depth and volatility.
- Blend algos (VWAP, POV, dark pool routing) depending on urgency.
- Run stress tests on liquidity scenarios, not just return forecasts.
Common pitfalls
- Backtesting without realistic cost assumptions.
- Delegating execution to brokers without oversight.
- Failing to adapt execution tactics to regime shifts (e.g., volatility spikes).
Key takeaways
- Execution costs compound quietly, often wiping out alpha.
- Measuring and managing execution is a first-order task, not an afterthought.
- Traders who master execution control one of the last true edges in markets.
Bottom line: In quant investing, the model may propose—but execution disposes. Treat execution as a P&L center, not an afterthought, and the difference shows up where it matters: returns.
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