The slippage paradox

TL;DR

The paper explains the paradox where all market participants incur systematic losses despite conservation of assets, attributing this to correlations between orders and price movements.

Contribution

It reveals that the systematic loss in trading arises intrinsically from order-price correlations, resolving the apparent paradox.

Findings

Transaction costs are systematically positive on average.

Order-price correlations explain the systematic loss.

The paradox is intrinsic to the trading process.

Abstract

Buying or selling assets leads to transaction costs for the investor. On one hand, it is well know to all market practionaires that the transaction costs are positive on average and present therefore systematic loss. On the other hand, for every trade, there is a buy side and a sell side, the total amount of asset and the total amount of cash is conserved. I show, that the apparently paradoxical observation of systematic loss of all participants is intrinsic to the trading process since it corresponds to a correlation of outstanding orders and price changes.