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Checklist, in Backtesting & Validation

Execution Cost Audit Checklist

Execution cost is where backtested edges quietly disappear. This checklist audits the real cost of getting in and out, both for validating a backtest's cost assumptions and for monitoring a live strategy.

12 items. Published May 26, 2026. By AI Fin Hub Research.

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Sections

Work in focused batches instead of one long wall

Section 1

Phase 1: Cost decomposition

3 items

Use the Execution Simulator: Estimate execution cost in closed form — square-root permanent impact, linear temporary impact, half-spread, and a latency-drift band. See the slippage a naive backtest hides.

Use the Broker API Comparator: Alpaca vs IBKR vs Tradier vs Schwab vs Robinhood — compare auth, rate limits, order types, market data, MCP, and fees before wiring a line of code.

Section 2

Phase 2: Benchmarking

3 items

Section 3

Phase 3: Edge survival

3 items

Use the Statistical Arbitrage Capacity Calculator: Maximum strategy AUM from alpha, slippage, fees, daily volume and volatility, and signal half-life. Square-root impact closed-form.

Section 4

Phase 4: Execution improvement

3 items

Tips

Small moves that make the checklist easier to finish

Plot the equity curve before and after audited costs. For high-frequency strategies the gap is often the entire result, which is why pre-cost backtests are so seductive and so wrong.
The mean cost lies. A strategy that pays a fair price most days and gets run over occasionally will show a tolerable average and an intolerable tail.
Cost sets a floor on trade frequency. If the expected per-trade return does not clear the round-trip cost, no amount of signal quality will save the strategy.

Run the numbers next

  • Playgrounds Order Book Replay Visualizer

    Drop a Level-2 snapshot CSV and replay the book snapshot by snapshot. Animated depth bars, best bid/ask, spread and imbalance. Understand microstructure before.

Sources

  1. Direct Estimation of Equity Market Impact , Almgren, Thum, Hauptmann, Li, Risk (2005)
  2. Trading and Exchanges: Market Microstructure for Practitioners , Larry Harris, Oxford University Press (2003)

Keep the topic connected

  • Checklist Backtest Hygiene Checklist

    Backtest hygiene checklist: point-in-time data, realistic costs, no look-ahead, aligned returns, and a reproducible run before you trust a number.

  • Learn Slippage

    Slippage as the gap between expected and executed price: the components (spread, market impact, latency), and how to model each in a backtest.

  • Learn Bid-Ask Spread

    Bid-ask spread defined: quoted vs effective vs realized spread, why the touch isn't the cost you actually pay, and how to measure each.

  • Learn Maker-Taker

    Maker-taker fee model: makers get a rebate, takers pay. Why the model exists, what it incentivizes, and how to size up real net cost.