Liquidity-Adjusted Position Sizer

Overview

This pillar analyzes a market's order book depth to calculate the maximum viable position size. It helps you avoid slippage, a hidden cost where large trades move the price against you, eroding your profits.

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

First, the pillar ingests live order book data for a selected market. Second, it calculates the average fill price for a simulated trade, factoring in how the trade would consume available orders. Third, it compares this average price to the current market price to quantify the slippage percentage. Finally, it presents the maximum trade size that keeps slippage below a specified threshold.

Methodology

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%.

Edge & Advantage

It prevents traders from turning a winning prediction into a losing trade by ensuring execution costs do not exceed the predicted edge.

Key Indicators

• Max Viable Size

  high

  The largest position you can take without exceeding your slippage tolerance.

• Estimated Slippage

  high

  The percentage your average fill price will deviate from the current market price for a given trade size.

• Order Book Depth

  medium

  A visualization of the cumulative buy and sell orders at various price levels.

Data Sources

• Prediction Market API

  Provides real-time order book data, including bid and ask prices and their associated volumes.

Example Questions This Pillar Answers

• → What is the maximum amount I can bet on 'YES' in this market without my price impact exceeding 1%?
• → How much will my price slip if I try to buy $5,000 worth of 'NO' shares right now?
• → Is there enough liquidity in this market to support a large trade, or should I scale in slowly?

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