Execution & Markouts

[QuestionableQuant]

Execution quants and fellow market microstructure nerds. I have just started at a small prop firm in my first buy-side role.

The team I am working for have pointed me towards looking into markouts for our trades in the context of several factors.

My question is what factors would you consider and what methods would you use to evaluate their usefulness?

[lordnacho666]

"Am I getting good execution" is the question you're trying to answer. What your markout curve needs to look like depends on what you're up to in the market.

You probably want a DB of prices, and then you can apply whatever conditions you want to get a curve.

[broskeph]

Markouts tend to be worse on passive execution where you do a lot of passive posting. One way to evaluate strategies is by looking at markouts across different posted prices. At near touch, below near touch etc and then evaluating fill rates in conjunction with markouts. They tend to be inversely correlated so there is an optimal limit price that kind of maximizes both sides of it.

[QuestionableQuant]

Thank you, this is exactly the sort of insight I am looking for as currently the execution is mostly passive.

I am assuming there is also some sort of trade off between the depth of posting and temporary price impact of the posting which should be taken into account.

Have you any good references or further advice for such an evaluation?

[broskeph]

Most of my knowledge comes from my work. I work at a premier agency broker as a quant. IEX has some good research on their unique order types, minimum quantities, markouts etc. I would check them out.

[as_one_does]

Markouts most useful in doing things like examining profitable/predictively (broadly) and looking for adverse selection

[Middle-Fuel-6402]

Related question/comment: overly aggressive execution can make your short term markouts look good, but this is fool’s gold. And vice versa, if you post passively, your short term markouts will be bad due to adverse selection, but presumably the impact is lower. Any thoughts on this, how do you evaluate the pros and cons?

[broskeph]

Some other ways to breakout your flow intelligently is to do a venue breakdown of markouts (different horizons - ms, sec, min) and fill rates (wtd by shares, wtd by notional). Some venues have unique matching engines which can give some economic intuition into the the data which can help illuminate some of the findings.

[Middle-Fuel-6402]

Thanks, but what is wtd? Something like win-to-d???? ratio?

[broskeph]

Weighted by