Execution cost is often reduced to spread and fees. If both are small, execution is assumed acceptable. For systematic and market-neutral trading, that shortcut routinely fails.
Realized execution cost is driven by queue position, order timing, and microstructure dynamics. This note is written for practitioners who treat execution as part of strategy design.
The Limits of Spread-Based Thinking
The bid–ask spread is a static snapshot; execution unfolds in a dynamic system. Two strategies trading at the same mid-price and paying the same fees can experience materially different realized PnL depending on:
- when orders are placed relative to queue formation
- how liquidity replenishes or disappears
- how aggressively the strategy interacts with the book
- how inventory evolves across legs and venues
These drivers sit outside the spread and dominate realized cost when sizing and turnover rise.
Queue Position Is the Hidden Variable
Limit orders are governed by queue position as much as price. Queue position depends on:
- arrival time
- order size
- venue matching rules
- cancellation and modification behavior of other participants
Two traders posting the same price can diverge: one fills immediately, the other waits, partially fills, or misses entirely. In backtests they look identical; in live trading their execution paths separate.
Why Market Orders Are Not “Neutral”
Market orders are described as "just paying the spread." That framing is incomplete. Market orders:
- concentrate adverse selection
- absorb liquidity during regime shifts
- amplify impact when books thin
- distort inventory in market-neutral strategies
For directional traders this may be acceptable. For pairs, baskets, and basis strategies it is often fatal. A market order executed at the "right price" can still break neutrality if the opposing leg fills later, worse, or not at all.
Microstructure Effects Compound in Market-Neutral Strategies
Market-neutral strategies assume that legs are executed symmetrically, exposure offsets cleanly, and residual risk is small and transient. In practice one leg fills faster, the other drags in the queue, inventory builds unintentionally, and exposure becomes directional.
This is not a signal problem. It is an execution sequencing problem. When execution is treated as plumbing instead of logic, neutrality drifts silently.
Crypto Makes This Problem More Acute
Crypto markets are often described as "highly liquid." This is true until regime shifts, when liquidity is episodic, books are shallow beyond top levels, and venue behavior diverges.
A strategy that appears robust on one venue can behave very differently on another even at the same price levels. Execution assumptions that hold in equities frequently fail in perpetual futures and decentralized venues.
Why Backtests Systematically Overstate Performance
Most backtests assume immediate fills, fixed slippage, no queue effects, and no interaction between legs. These assumptions bias results upward. The more execution-sensitive the strategy, the larger the gap between simulated and realized performance. This gap is structural, not noise.
Practical Implications for Strategy Design
When execution is modeled as a constant cost, alpha decays live, turnover rises unintentionally, risk accumulates invisibly, and strategy behavior changes under stress.
Execution must be treated as part of the strategy, not an implementation detail. That includes:
- pacing and aggressiveness rules
- leg coordination logic
- inventory-aware decision making
- venue-specific behavior
Without this, even well-researched strategies degrade when capital is deployed.
Execution Is a First-Class Design Variable
Serious trading systems do not ask: "What is the spread?" They ask: "How does this strategy interact with the order book over time?" The answer determines fill quality, neutrality, drawdown behavior, and whether research survives contact with the market.
Execution is not an optimization step at the end. It is a design constraint from the beginning.
Closing Thought
Many failures attributed to market conditions or alpha decay are, on inspection, execution failures. The difference between a strategy that works on paper and one that survives live trading is often not the signal, but how it is executed.