Markout Calculation is a post-trade analysis technique used in financial markets to measure the price movement of an asset after an order’s execution, typically within a short, predefined time window. Its purpose is to assess the quality of an execution, identify potential information leakage, or quantify the true market impact of a trade. This metric helps traders evaluate the effectiveness of their execution strategies.
Mechanism
The operational mechanism for markout calculation involves capturing the precise execution timestamp and price of a trade, then monitoring the subsequent price trajectory of the traded asset over a specified interval, often seconds or minutes. Systems compute the difference between the execution price and the market price at the end of the markout window. In crypto, this requires high-fidelity timestamping and access to consolidated, real-time market data across various exchanges and liquidity sources to accurately measure post-trade price action and detect subtle market movements.
Methodology
The strategic methodology behind markout calculation serves as a key performance indicator for execution algorithms and liquidity provider evaluation. A positive markout (price moving favorably after a buy, or unfavorably after a sell) may indicate a poor execution or adverse selection, while a neutral or negative markout suggests efficient execution. This analytical framework is crucial for refining smart order routing, optimizing algorithmic trading parameters, and scrutinizing the performance of Request for Quote (RFQ) counterparties within the volatile digital asset markets.
Dealers quantify adverse selection risk by systematically analyzing post-trade markouts to score and tier clients, embedding a predictive risk premium into their RFQ pricing models.
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