How many good trades undo one bad fill?

Question

You quietly earn a 2-cent spread on ordinary round trips of 1{,}000 shares, call it \20 of clean profit each. Then one informed trader sells you 5{,}000 shares right before the stock drops 10 cents, leaving you with a \500 loss on that single fill. How many good round trips does it take to recover one bad fill? What does that ratio tell you about where to focus?

Accepted Answer

The arithmetic. Each good round trip nets 0.02 	imes 1{,}000 = \20. The toxic fill cost 0.10 	imes 5{,}000 = \500. To recover it you need \frac{500}{20} = 25 	ext{ good round trips.} Twenty-five clean, uneventful trades just to get back to zero from a single bad one. Why the ratio is so lopsided. Two multipliers stack against you on the bad fill: it was bigger (5{,}000 vs 1{,}000 shares) and the adverse move (10 cents) dwarfed your normal edge (2 cents). Informed flow tends to be exactly like this, larger size, worse markout, precisely because someone with real information presses their be…

How many good trades undo one bad fill?

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