A Markout Curve is a quantitative analytical tool employed in financial trading to evaluate the post-execution price performance of a trade. It graphically depicts the profit or loss generated by an order over a specified time horizon following its completion, offering insights into execution quality and market impact.
Mechanism
This curve is constructed by calculating the difference between the actual trade execution price and the prevailing market price at various predetermined intervals subsequent to the trade, such as milliseconds, seconds, or minutes. It captures the trajectory of market prices relative to the transaction point, revealing whether the trade induced a temporary or lasting positive or negative price movement. This analysis helps identify adverse selection or unintended market signaling.
Methodology
The strategic purpose of analyzing markout curves is to refine and optimize order execution algorithms and assess the efficiency of trading strategies. By aggregating data from numerous trades, institutions can statistically evaluate if their execution logic consistently minimizes negative market impact, thereby reducing implicit transaction costs. In high-frequency and institutional crypto trading, where liquidity dynamics are critical, optimizing markout performance directly contributes to alpha generation and overall profitability by enhancing the precision of trade execution.
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