Benchmarking Passive Fills and Measuring Adverse Selection
Summary
The document frames how to compare passive executions in a security when fills share the same quoted edge. It treats the difference between the fill price and midprice as an initial estimate of edge, while recognizing that realized profit also depends on adverse selection and market impact. It asks for a metric that can rank fills and for a way to quantify adverse selection.
No answer, benchmark definition, or empirical results are provided, so the document does not establish which metric is appropriate. Any evaluation would need to define the relevant time horizon and reference price, and distinguish the initial spread capture from subsequent price movement and execution impact. The question is useful as a problem statement for execution analysis, but it leaves the measurement choices and proposed method unresolved.
Key ideas
- The fill-to-midprice difference is presented as a starting measure of execution edge.
- Realized passive fill profitability also depends on adverse selection and market impact.
- Comparing fills requires a defined benchmark, but the document proposes no specific metric.
- The document does not quantify adverse selection or report results.
Tags
Full text
# Evaluating passive fills # Evaluating passive fills Assume we look at all passive fills going through a security. How do we benchmark how good each passive fill is (relative to each other)? We expect the edge to be (assuming midprice is our theoretical value) to be the spread between midprice and our fill, and our expected profit would take into account adverse selection & market impact as well. That being said, given the last 100 fills (all executed with the same 'edge'), what is a good metric to rank those fills? Also -- how can we quantify adverse selection?
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