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Slippage

Updated on May 30, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Slippage Meaning

Slippage refers to the difference between the expected price or market order price and the execution price. The phenomenon occurs during trading in financial instruments. The effect results in buying at a price higher or lower than the intended price implying it can be positive or negative.

The effect is common when the financial market is highly volatile with lively price movements or low trading volume. Traders can implement mitigating techniques like slippage tolerance which is usual in a cryptocurrency market. It indicates the maximum difference the trader could accommodate and beyond which they will not execute the trade.

Key Takeaways

  • Slippage in trading refers to the price difference between the specific price decided by the investor to place an order and the price at which the order is fulfilled.
  • It increases with factors like market volatility, bid-ask spread, and order size.
  • It is not always a disadvantage; the investors also benefit from the quick price changes.
  • To minimize its impact, investors set tolerance levels, limit orders, or stop-limit orders so that trade will not happen above a certain predetermined price level.

How Does Slippage Happen in Trading?

Slippage portraying the difference between the actual and expected price is widely prevalent in financial markets like the stock market, bond market, forex, and commodities. It may or may not be considerable. For instance, it increases with factors like order size, price volatility, and bid-ask spread

Slippage Meaning

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When a trade order is placed, it is not completed at that moment and is not guaranteed that the investor will have the price they desire. During the buy or sell order placement, the buyer or seller places the order at a specific price and number of shares in mind. With computerized trading, transactions may get finalized in seconds or minutes. However, this is enough time for the price of the financial instrument traded to change.

In addition, in a highly volatile market, many trades are happening simultaneously, which leads to very rapid spikes and drops in prices. The result is a quick succession of price changes that will affect traders who place market orders during that time and expect them to be fulfilled simultaneously.

Slippage is an issue that is not major in small transactions. However, when bulk transactions are made, even small changes in price due to its effect can result in the gain or loss of millions. Therefore, it is an important factor, especially for the major players in the industry. Understanding it and learning how to foresee and manage it plays a major role in managing positions in the market. Even small traders who do not make large orders can learn about it and become more successful traders. 

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Slippage Example

An example is when one places an order to buy 100 shares of Netflix Inc. Assume the bid price is 598.00, and the ask price is 599.10. When the market order is placed, the individual expects to receive 100 shares at $599.10. However, price slippage can occur such that just after the order has been placed, the ask price changed to 599.17. If the trade is then completed at this point, the investor will have to spend $0.07 more per share. Hence causing a negative slippage.

The price change can be attributed to different factors. An example is a press release that indicates positive news about the company, like a new innovative product launch or quarterly report emphasizing high earning. It will lead to a clamor, with more people opting to buy those shares instead of others. As a result, it raises the price of the shares. Most experienced traders advise not to trade when there is an expected major global financial announcement. The most severe form of price difference occurs when the market is very volatile, where prices of financial instruments can swing back and forth by a very large margin.  

How to Avoid Slippage?

A positive slippage effect is favorable, while a negative impact is unfavorable. Therefore, a trader can adopt different measures to lessen the effects of negative ones. Some of the measures are listed below.

  • Avoid trading when the market is in high volatility. Prefer the time with high trading volume and low volatility. It provides a steadier marketing environment with lower price change risks.
  • Use limit order or stop-limit order instead of market order since the latter possess risk that the order will be made without any lower or upper range restrictions.
  • Just before major financial announcements, such as the US nonfarm payroll, do not take market positions. There can be temporary volatility during this period, which leads to a high chance of price variations in many trades. 

It would be ideal for letting an experienced trader handle investment decisions to control slippage. However, if one is committed to doing so on their own, it would be worth their while to take some time and learn about it, why it occurs, and how they can control it or make it work to their advantage.

Frequently Asked Questions (FAQs)

What is slippage definition?

Slippage in trading refers to the difference between the price the investor anticipated to initiate the transaction and the actual trade execution price. The phenomenon is common in highly volatile markets, and low trading volume supplements the effect.

What is liquidity and slippage?

Slippage is often linked to the level of liquidity in the financial market. Low liquidity causes high slippage and vice versa. A combination of low liquidity and high volatile market exhibit an increased time gap between order placement and execution and quick price changes, respectively. Subsequently, intensifying the difference between the order price and execution price.

What is slippage in Crypto?

The volatile nature of the cryptocurrency market upholds the fluctuating price of virtual currencies like Bitcoin, depending on factors like trade volume. Hence there is no assurance that the requested price will match the cryptocurrency trade execution price. If it does not match the difference in requested and executed price, manifest the slippage in Crypto.

This has been a guide to Slippage and its meaning. Here we explain how slippage happens in Trading and Cryptos along with examples and measures to avoid it. You may learn more about financing from the following articles –