Portfolio123 offers three options for estimating the transaction costs for a more realistic simulation.

Advanced Slippage

Portfolio123’s Advanced Slippage is based on the square root impact model. It estimates realistic transaction costs using two components.

Slippage% = (K) * Impact% + (L) * Spread%

Impact% = Volatility * Sqrt(AbsTradeAmount / Liquidity)

• Volatility = 20 day standard deviation of log returns

• AbsTradeAmount = TradePrice * Abs(TradeShares)

• Liquidity = MedianDailyTot(20)

Spread% = Median((Ask[i] - Bid[i]) / Close[i])  i=0..9

• Limit value of Spread% = 30%

• Before 2004 the fallback calculation is used due to unreliable bid/ask data

Calibration Constants

K: for empirically adjusting the Impact effect on costs. Default is 2.0

L: for empirically adjusting bid/ask spread effect on costs. Default is 0.5

Fallbacks

When Liquidity is N/A

Estimate based on MktCap in a linear and proportional fashion

Liquidity = 0.50% of Market Cap * 1M

When Spread% is N/A

Estimate based on Liquidity in a non linear and inversely proportional fashion. Raising to a negative value reverses the direction: higher liquidity corresponds to lower spreads.

Spread% = Pow(Liquidity, -0.4)
If Spread% is N/A
    Spread% = 30%

When Volatility or Liquidity is N/A

Impact is set to a very high value so that problems become obvious and do not go unnoticed. 

Impact% = 200%

Variable Slippage

First, The "base" slippage is computed as 1% divided by Price in USD. For example, a stock that trades at $20 will have a base slippage of 0.05% (1/20), one that trades at $5 will have a base slippage of 0.2% (1/5), and one that trade for 1 penny will have a base slippage of 100% (1/0.01).

Next, "liquidity" slippage is calculated as follows:

Liquidity is calculated from the 10-day average daily amount traded (volume * price), and slippage is set according to these liquidity ranges:

Finally, "total" slippage is calculated as "base" slippage + "liquidity" slippage

NOTES

The liquidity ranges apply for strategies in USD. For CAD, divide them by 0.8. For EUR, GBP, and CHF, divide them by 1.25.

ETF systems use a constant 0.10%; they are liquid by design, so we penalize them minimally. As a practical matter, the expert stock models we make available on this site have rules that eliminate stocks in the lower-liquidity categories.

Fixed Slippage

Fixed % amount is deducted based on the transaction amount.

Slippage Functions

You can use these functions in buy/sell rules, ranking and screening.

SlippageAdv( amount [, spread = 0.5, impact = 2.0, offset = 0, bars = 20])
Calculates the advanced slippage based on an amount being traded. You can use if for ranking, screening or to fine tune the constants for your needs.

SlippageVar( bars )
Calculates the variable slippage. Note that in simulations variable slippage period is hard-coded to 10 bars lookback.