Execution Decay refers to the degradation in the quality or profitability of a trading strategy’s expected performance over a period. This often results from shifts in market microstructure, increased competitive activity, or the strategy’s inherent alpha erosion.
Mechanism
This phenomenon occurs as trading signals weaken, liquidity patterns shift, or latency advantages diminish within the market. Increased participation or the adaptation of other algorithms can reduce a strategy’s edge, causing realized execution prices to deviate negatively from predicted price levels.
Methodology
Mitigating execution decay involves continuous algorithmic refinement, dynamic parameter adjustment, and exploration of new data sources. This also necessitates periodic re-evaluation of market impact models to adapt to evolving market dynamics and competitive landscapes, preserving strategy efficacy.
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