Execution risk is the possibility that a trade will be completed later, partially or at a different price from the one expected.
A correct market idea can still produce an unfavourable result when spreads widen, liquidity disappears or price moves before the order reaches the market.
Decision
The trader selects the instrument, direction, order type and quantity.
Order submission
The instruction travels through the platform, broker or exchange infrastructure.
Market validation
The venue checks available liquidity, price conditions and account requirements.
Execution
The order interacts with available buyers, sellers or liquidity pools.
Confirmation
The trader receives the actual price, quantity, time, fees and remaining order status.
What Is Execution Risk?
Execution risk appears between the decision to trade and the completion of the transaction.
It can affect:
- entry price;
- exit price;
- filled quantity;
- transaction cost;
- stop-loss behaviour;
- margin requirements;
- the final risk-to-reward relationship; and
- whether the order is completed at all.
The displayed quote may change before the order reaches the market, while the available quantity at that price may be smaller than the order.
What Is Slippage?
Slippage is the difference between the price expected when an order is submitted and the average price at which it is actually executed.
Execution is less favourable
A buy order executes above the expected price or a sell order executes below it.
Execution is more favourable
A buy order executes below the expected price or a sell order executes above it.
Slippage becomes more likely when prices move rapidly or when the requested quantity is larger than the liquidity available at the best quote.
During a sudden market repricing, several price levels may disappear before the order is completed.
Why Market Gaps Occur
A market gap appears when the next available transaction occurs materially above or below the previous trading price.
Common causes include:
- overnight news;
- weekend developments;
- earnings announcements;
- economic data releases;
- central bank decisions;
- exchange interruptions;
- trading suspensions;
- low-liquidity market sessions; and
- large order imbalances.
Opening gaps
Markets with defined trading sessions may reopen at a different level after information accumulates while the venue is closed.
Intraday gaps
A sudden announcement or loss of liquidity can cause price to jump between available transactions during an active session.
Continuous markets
Markets that trade continuously can still experience temporary gaps when available orders are removed faster than new liquidity appears.
Market, Limit and Stop Orders
A market order increases the probability of execution. A limit order increases price control but introduces the possibility of no execution.
Three Common Slippage Scenarios
Large order, normal market
The first price level cannot absorb the full quantity, so the remaining order executes at additional prices.
Major news release
Quotes are removed or updated rapidly while spreads widen and price moves before the instruction is completed.
Stop triggered by a gap
The stop activates after price has already moved beyond the intended exit, producing a larger realised loss.
Partial Fills and Rejected Orders
An order may be completed in several separate transactions when insufficient liquidity is available at one price.
The remaining quantity may continue working, be cancelled or execute at different prices depending on the order instructions and venue rules.
An order may also be rejected because of:
- insufficient account balance or margin;
- invalid quantity;
- price limits;
- market suspension;
- expired order instructions;
- restricted account access;
- platform or connection problems; or
- rapidly changing market conditions.
A rejected exit order leaves the original position exposed until another valid instruction is submitted and executed.
Liquidity and Position Size
Execution risk grows when position size is large relative to the market’s available depth.
A transaction that appears small in a major market may be significant in a thinly traded stock, token, currency pair or derivative.
Useful liquidity observations include:
- the bid-and-ask spread;
- available quantity near the current price;
- normal trading volume;
- market hours;
- recent volatility;
- order size relative to visible depth; and
- whether liquidity depends on one venue or provider.
The distance to a planned stop may not represent the true maximum loss when price can gap or slip beyond it.
Platform and Infrastructure Risk
Execution also depends on technology connecting the trader with the market.
Operational failures can include:
- internet interruption;
- delayed market data;
- frozen platform interfaces;
- exchange outages;
- broker routing problems;
- blockchain congestion;
- failed decentralised transactions;
- incorrect order parameters; and
- duplicate submissions after an uncertain response.
When confirmation is delayed, verify the order and position status before submitting the instruction again.
How to Review Execution Quality
A post-trade review should compare the planned transaction with the actual result.
Record:
- the displayed price before submission;
- the actual average execution price;
- spread and slippage;
- filled and unfilled quantity;
- commission and financing costs;
- order submission and execution times;
- market conditions;
- the selected order type; and
- any technical or behavioural errors.
Repeated execution problems may indicate that the position size, market, trading time or order type is unsuitable for the process being used.
A Pre-Trade Execution Checklist
Check the market session
Identify whether liquidity is normal, reduced or affected by an opening or closing auction.
Review scheduled events
Check economic releases, earnings and policy announcements that may produce rapid repricing.
Measure spread and depth
Compare the planned quantity with the liquidity available near the current price.
Select the order type
Decide whether completion or price control is more important under the current conditions.
Allow for slippage
Include transaction costs and imperfect execution in the planned financial risk.
Confirm the completed order
Review the actual quantity, average price and remaining instructions immediately after execution.
A trading plan is incomplete until execution risk is included.
The market price visible during analysis is only a reference. The final result depends on the prices and quantities available when the order reaches the venue.
A responsible execution review considers:
- market gaps;
- bid-and-ask spreads;
- slippage;
- partial fills;
- order-type limitations;
- market depth;
- scheduled news;
- platform reliability;
- position size; and
- the possibility that a stop executes beyond its trigger.
Execution risk cannot be removed completely, but it can be reduced through smaller exposure, suitable order instructions, liquid markets and realistic assumptions about transaction costs.
Author
I am Yuriko, a full stack blockchain developer. I got into programming in high school, and have been hooked ever since. I love pushing the boundaries of what is possible with code, and exploring new ways to solve problems.
I am 35 years old, and started my career as a web developer. I soon transitioned into blockchain development, and have never looked back. I am excited about the potential of blockchain technology to change the world, and am committed to doing my part to make that happen.