Real Accounts vs. Paper Trade Accounts
There is a lot of debate surrounding the fairness of order fills with a paper trading account compared to that of a real trading account. Some of the criticisms comparing the two account types are very accurate and true. Other criticisms (on the other hand) are either false and/or misleading based on second- or third-hand reports from a well-meaning dolt.
The most common criticism (when discussing the accuracy of the fill prices of a paper trade to that of a real trade) is, “The trader always gets a better fill in a paper trade account that a real account”. Others take this argument one step further and state, “You get filled on paper trades in the middle of the bid and ask spread, and therefore are given undeserving fills”.
Some of these comments/arguments may be true in an over generalized manner, but there maybe a lot of rubbish there as well. Stratagem is convinced that their retired floor trader can create ten (10) examples of trades in a day that will be filled in an actual trading account, but wont be filled (even at worse prices) in a paper account.
At the day of this writing, such an example occurred. We had entered an order to close out a small short vertical call spread position expiring the following morning. In the paper trade account, we watched as the paper trade sat and sat and sat. The order entered for a call spread to be purchased for $0.40 was not being filled. With a bit of confusion as to why this would happen (when instinct told this retired SPX floor trader that he could probably buy it for $0.35 or $0.40), he entered a smaller order into a real account.
To compare apples to apples, our instructor entered an order to buy three contracts (to open) of the call spreads for $0.40 in a real account and ten contracts of the same spread in the paper trade account.
We were filled instantly (within a second of hitting the SEND button) on the real trade, and at a price of $0.35 ($0.05 better than we were willing to pay).
We not only waited and waited for over 20 minutes to get filled in the paper account, we were filled at $0.40. This fill price in the paper account was WORSE than that in the real account.
Below is the chronological order of events laid out in order to give you a better understanding and explanation of what occurred.
TIME PERIOD #1
An order was entered to close an existing paper trade position in the SPX. We had a short SPX 2095-2100 call spread we wanted to close for $0.40. The order was to buy the 2095 calls and sell the 2100 calls as a package for a $0.40 debit as seen below:
The word “Working” appears on the right of the above image indicating that the order has not been filled.
TIME PERIOD #2
So time passed as our trader became frustrated that this order was not filled. He believed that it could have been filled in a real account. Since this is pretty much a worthless trade, our trader didn't want to waste more than the price of a decent meal on these spreads. He placed an order to buy three contracts of the spread for $0.40 in a real account. This was done for no other reason than he was paranoid that he was losing his instinct for where things should be filled. By placing a real trade at the same price, he would get a better understanding of what was going on. “Maybe the technology associated with the paper trading account was broken”, he thought?
Our Lead Instructor placed the order to buy three contracts of the same spread, at the same price, AFTER the paper trade order went in. No one can claim he placed the real trade before the paper trade, thus being filled for a split second before the window closed to be filled on the paper trade.
Above you see the trading platform of the real account showing a “FILLED” designation at 10:10:41am. Keep in mind that in this portion of the platform, it only indicates the order was filled, but not at what prices the package (the bought and sold options) and overall pieces were filled.
TIME PERIOD #3
After seeing the REAL order was filled, our trader went into the account to see the actual REAL fill prices and saw the following:
The real trade was filled for a $0.35 debit, a price $0.05 better than he was asking for when he placed the trade. Yet the paper trade was still pending with a message continuing to indicate it was still “working”.
TIME PERIOD #4
It was NOT until 13 minutes after the real order was filled that we happened to be filled on the PAPER trade.
Here are the problems with the paper trade:
ONE – Had the market moved appreciable higher in those 13 minutes (from when the real trade was filled and the paper trade eventually was filled), we might not have even been filled on the paper trade as the price of the spread would have increased.
TWO – We were filled on the paper trade at $0.40, not $0.35 like on the real trade. This costs us $0.05 more on the paper trade. People claiming you get filled on paper trades at better prices than real trades are only half right – meaning half the time they are right.
There are plenty of examples where paper trades get filled at worse prices than real trades.
It is our contention and belief that there is (admittedly) a difference between a paper trade and a real trade.
The differences are obtuse and NOT understood by most people. We started this write-up by making an assertion that it is very likely our instructor can create ten trades a day that would be filled in a real account, but not filled (or filled at worse) prices in a paper account. Supply and demand, market direction, volatility trend, trader’s current positions, etc. all play a role in fill prices. It is not as simple as simply splitting the big-ask spread and half.
Executing a trade is much like buying and selling at a flea market. The actual price a product sells for is determined mostly based on how badly the consumer wants the product versus how badly the vendor wants the money.
Anyone making a naive blanket statement about one (paper or real account) being an unfair comparison to the other is right, but usually not correct in their understanding of why they are right.
We feel paper trading is an invaluable tool to the novice trader wanting to practice strategies before playing with real money. Prior to technology making paper trading feasible, traders had to write down on paper what their order would have been. Writing a journal about a fictitious trade is subject to even greater bias (than an electronic paper account). It is very easy for an investor to look at an option chain and create a “fake” fill price they over-optimistically believe they can buy or sell a spread at. The paper trade account dampens one’s ability to nudge results in their favor.
Physics has proven that light is both a wave and a particle. How light reacts, though unbelievable, depends entirely on the observer's expectations. If the viewer of a scientific experiment expects light to behave like a wave, then it will. If the observer thinks it will act like a particle, then that is how the results will turn out. This is crazy, but true. And that is physics. It is even easier for people without a paper trade account to unintentionally guesstimate what fill price they would receive if a paper trading platform were not available.
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