How Does a Market Maker Estimate the Future Slippage Cost for a Hedge?
Market makers estimate future slippage cost by analyzing historical market data, specifically the depth and elasticity of the order book for the underlying asset. They use models that factor in the expected size of the hedge (derived from the option's Delta and the RFQ size) and the asset's typical market impact profile to project the likely execution price difference.
Glossar
Market Impact Profile
Shape ⎊ The market impact profile describes the functional form of the price change resulting from an executed order, illustrating the non-linear relationship between trade size and price movement.
Slippage Cost
Impact ⎊ Slippage cost, within cryptocurrency, options, and derivatives, represents the difference between the expected trade price and the actual execution price.