Liquidity-Adjusted Position Sizer

What It Does

It scans the real-time order book to measure the volume of buy and sell orders at every price level. The pillar then simulates trades of increasing sizes to calculate the potential price impact, known as slippage. Based on a user's defined tolerance for slippage, it determines the largest trade that can be executed without significantly moving the market.

Why It Matters

A correct prediction is worthless if execution costs erase your edge. This pillar protects your profitability by ensuring your trade size is appropriate for the market's capacity, turning theoretical gains into actual returns.

How It Works

The pillar aggregates cumulative volume on both the bid and ask sides of the order book. It calculates the Volume-Weighted Average Price (VWAP) for a simulated trade of size 'X'. Slippage is calculated as |VWAP - Mid_Price| / Mid_Price. The final output is the maximum 'X' where Slippage is less than or equal to a User-Defined Tolerance, typically 0.5% to 2%.

Key Indicators Analyzed

• Max Viable Size
• Estimated Slippage
• Order Book Depth

Data Sources

• Prediction Market API

Details

Category

universal

Subcategory

meta_analysis

Try This Pillar

Use the Liquidity-Adjusted Position Sizer pillar in PillarLab to analyze any prediction market.