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Liquidity effect in backtesting and paper trading

Hi,

I had a small question concerning backtesting and paper trading.

In real-life trading, when liquidity for a stock or ETF is low, an order may not be fully filled at the current bid or ask. In some cases, there may even not be any demand for this stock or ETF.

I was wondering if this effect is simulated at all in backtests, and in paper trading. This may have a major impact on the real-life performance of a strategy that depends on the quick purchase/sale of large quantities of assets.

Anyone would have any impressions or comments on this?

Thanks! :)
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I am actually more interested in ETFs.

Hypotetical strategy:
- Buy then sell a large quantity of one ETF, only once a day.
- Each order must be filled within 1-5 seconds.

How will liquidity affect such a strategy? How to chose the right ETFs for the job?
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Apologies for the delay! The memory leak is almost solved now :) The live trading beta has been running stable for 19 hours @ 53Mb. At 36+ hours we can pop the champagne..

IMHO; Degree of impact depends on the volume underlying assets; for low volume assets you'll have a greater impact. I determined a stocks volume by just looking at the daily average trading volume on Google :) . We don't have a way to look at historical volume yet; this would be broadly classified as fundamental data. Once we can afford it we'll buy a fundamental data set for the community.

I couldn't comment on the ETF's specifically, what order types are you using? Won't most ETF's be sufficient? (i.e. all have more than $10M volume per day)
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I don't think you could simulate it in backtests with minute bar data. You might be able to simulate it with tick data but I am not sure if this gives you insight into the ask/bid spread. I plan on dealing this with limit orders set slightly outside of the current market price and to simply not trade low volume ETFs. They are a pain to deal with manually trading already!
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


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