Evaluating Intraday Equity Strategies After Slippage and Trading Costs
Summary
The discussion addresses how to assess an intraday equity strategy whose backtest shows about one cent of gross profit per trade before transaction costs. It emphasizes that Sharpe ratio and profit per share are useful, but neither establishes viability without commissions, exchange fees and rebates, taxes, adverse selection, and market impact. A small apparent edge may disappear after these costs, depending on trading volume, liquidity, and execution conditions.
For slippage sensitivity, the suggested approach is to rerun the backtest with several assumed spread costs and compare the resulting Sharpe ratios. This can show how much execution cost the strategy can tolerate and how it might fare under less liquid conditions. Market impact depends on order size and the security’s liquidity, so it cannot be inferred from a generic spread assumption alone. The discussion also raises whether to retain symbols with poor historical results, but does not resolve that selection question; discarding them based on backtest performance could require further validation.
Key ideas
- Evaluate intraday returns after commissions, fees, rebates, taxes, adverse selection, and market impact.
- Test strategy sensitivity by varying assumed spread and slippage costs in the backtest.
- Execution costs depend on the security, liquidity, order size, and trading volume.
- Use both Sharpe ratio and profit per share while checking whether the gross edge survives realistic costs.
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# How to vet an intraday strategy # How to vet an intraday strategy I am working on an intraday strategy using 5/10 minute bars. I am getting a decent return and sharpe on the strategy. But on close examination I see that I am making about 1 cent per trade (I haven't taken transaction cost into account). How do you guys go about choosing a good intraday strategy ? I have always used sharpes and CGAR for long-hold time strategy but seems like evaluating intraday strategies is a different beast. I also notice that my strategy makes money for symbols in certain sector, and not for other ( this is my backtesting dataset). Do you normally throw out symbols with negative returns when doing a forward test as part of your portfolio ? EDITED: This strategy is based on US equities and yes I am using a combination of midprice and previously traded price. Question is quite simple I think, how do you guys evaluate intraday strategies ? How big of a factor is slippage intraday ( on a 10 minute scales for example). ? ## Answer by strimp099 (score 2, accepted) https://quant.stackexchange.com/a/2427 If you are making 1 cent per trade before slippage and commissions, I don't necessarily think this is a viable strategy - commissions alone might evaporate that edge. If you are adding liquidity (as defined by the exchanges) perhaps you can obtain rebates to offset commissions and slippage. Slippage can vary depending on the securities being traded. Further, it includes eating the spread and moving the market based on your size. For an intraday strategy, I assume you'll be trading the most liquid securities you can find that will reduce the spread slippage. When backtesting, use different size spreads for slippage estimation. For example, 1 cents, 2 cents, 3 cents, etc. See what your Sharpe ratio looks like at each level of spread so you can get an idea of how the strategy might perform in times of market stress (illiquidity). In terms of getting worse prices for your trades because of size, that really depends on your strategy. If you're trading one or two round lots of SPY, chances are you can get filled without moving the price. That's a bit harder to determine. In general, you can simulate your strategy with different parameters and assumptions and see what combination of parameters generate the highest Sharpe ratio. Build your backtest so it takes a variable input for slippage. As the slippage increases, your Sharpe ratio should decrease. When the Sharpe ratio gets to a certain unacceptable level, you should know what slippage you need to do better than. ## Answer by Robert Kubrick (score 1) https://quant.stackexchange.com/a/2729 Your PnL is a function of traded volume, transaction costs and mills p/share (mills meaning $0.001 p/share). You also have to include exchange rebates and fees, a significant adjustment given your backtested results. 1 cent net p/share is actually a good return for high-frequency or market making strategies that trades in the millions shares p/day. However, given the time periods you indicate I doubt your strategy is trading that kind of volumes. Then there is adverse selection which of course will lower your net PnL. Finally you have to consider SEC taxes and your broker or proprietary infrastructures cost. Market impact (slippage) is a function of your order size, stocks liquidity and other factors. There are Phd treatises on the subject, it's impossible to give a valid answer in two sentences. In any case Sharpe and profit p/share are good metrics for evaluation. That is what I use during model development.
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