Execution Risk
Execution risk is the risk that you cannot trade at your reference price due to spread, depth, or slippage.
Definition
Execution risk is the risk that your realized fill differs from your reference market price due to bid ask spread, limited liquidity, and slippage.
Why it matters
Execution risk can erase small edges. In thin markets, even a correct probability estimate can lead to poor outcomes if you consistently execute at unfavorable prices.
How to reduce it
• Use the order book to judge depth.
• Prefer limit orders when possible.
• Track execution metrics like effective spread.
Common pitfalls
Assuming mid is tradable: Mid is a reference, not a guarantee.
Ignoring size: Larger orders face higher execution risk.