What you will learn
- Separate execution from settlement obligations.
- Include fees and execution differences in a cash calculation.
Settlement
Cycles are written as T+N, meaning N business days after the trade date. Some markets settle equities on T+1, others on T+2 or different schedules, and some instruments settle the same day; holidays and cut-off times can move the date.
Derivatives settle at expiry by cash payment or physical delivery, depending on contract terms, and crypto transfers settle on the network after enough confirmations. Settlement risk is the chance that one side fails to deliver or pay, which clearing arrangements and delivery-versus-payment rules aim to reduce.
Slippage
Slippage tends to be larger for market and stop orders, for large orders relative to available depth, and during news, opens and fast markets. It is usually measured against a reference price such as the quote when the order was sent, the midpoint, or the previous close.
Because the same strategy traded in a thinner market suffers more slippage, it should be estimated per instrument and order size, not assumed to be a constant. Backtests and performance records that ignore slippage can overstate results, particularly for frequent or large trades.
Transaction Costs
Explicit costs appear on the trade confirmation; implicit costs show up as the difference between the price you expected and the price you obtained. Spread and slippage generally widen in illiquid or fast-moving markets and for larger orders, and leveraged or short positions can add financing or borrowing charges.
Costs are paid on every trade, so their drag grows with turnover: approximately round trips per year × cost per round trip. A strategy whose average gain per trade is smaller than its cost per trade has no edge after costs, however good the gross figures look.
Worked example: A trade is more than its displayed value
Illustrative: 500 shares execute at HK$30, creating HK$15,000 of consideration. An illustrative HK$25 charge raises the funding need to HK$15,025. The settlement deadline follows the instrument’s applicable calendar and rules, not a universal T+2 assumption. A quote seen earlier would not change the actual funding obligation.
Check your understanding
An illustrative trade settles for HK$8,000 and has HK$18 of charges. What must be funded, ignoring any other obligations?
Show answer and explanation
HK$8,018. This is an illustrative cash calculation, not a statement of any venue’s current charges or settlement cycle.