What Is Slippage?

The discrepancy between a trade’s estimated price and its execution price is known as slippage. Although slippage may sometimes happen, it is more common when market orders are utilized during increased volatility. It may also happen when a big order is placed, but more trades should be made at the selected price to keep the bid/ask spread at its present level.

How does slippage work?

Since slippage is defined as any difference between the expected execution price and the actual execution price, it does not indicate a positive or negative movement. The security is bought or sold at the best price an exchange or other market maker provides when an order is fulfilled. This may provide outcomes that are less beneficial than the planned execution price, equal to, or more favorable than that. There are three possible outcomes for the final execution price: positive slippage, no slippage, or negative slippage compared to the planned execution price.

Because market prices may move quickly, slippage can happen while a deal is being ordered and still needs to be completed. Although meanings vary, the word is used in various commercial contexts. However, each location tends to experience slippage under various conditions.

Although a limit order prevents negative slippage, there is always a chance that the transaction won’t be performed if the price doesn’t reach the limit. The likelihood that a deal will be executed at the planned execution price is severely limited when market swings happen more rapidly.

Limit orders help investors prevent negative slippage.

An Illustration of Slippage

A rapid shift in the bid/ask spread is one of the most frequent causes of slippage. When this occurs, a market order may be executed at a price that is less or more advantageous than initially planned.

In an extended transaction, the ask has gone up, and in a short trade, the bid has gone down due to negative slippage. In an extended transaction, the ask has dropped, and in a short trade, the bid has climbed due to positive slippage. Market players may hedge against slippage by steering clear of market orders and placing limit orders.

For example, Apple’s bid/ask prices are shown on the broker interface as $183.50/$183.53. A market order is made for one hundred shares to fill the order at $183.53. Nevertheless, before the order is completed, automated algorithms’ microsecond operations raise the bid/ask spread to $183.54/$183.57. After that, the order is completed at $183.57, with a negative slippage of $0.04 per share or $4.00 for every 100 shares.

The Forex Market and Slippage

When a market order is filled or a stop-loss closes the position at a rate that differs from what was specified in the order, forex slippage occurs. Stop-loss orders are a standard tool traders and investors use to reduce possible losses. Using option contracts is an alternate strategy to reduce your exposure to downside losses in rapidly moving and consolidating markets.

In the forex market, slippage is more likely to happen when volatility is high—possibly due to news events—or when the currency pair trades outside the busiest trading hours. Reputable forex brokers will execute the transaction at the next best price in both scenarios.

Methods to Lessen the Effect of Slippage

While there are techniques to prevent or lessen its effects, investment will inevitably include some degree of slippage. Market volatility or a lack of liquidity are the typical causes of slippage. Thus, time and the kind of asset you’re dealing with are essential.

Exchange peaceful times

You are less likely to be caught off guard by slippage in a less volatile market. Avoid making investments just before or after significant economic news or updates about securities you intend to trade, such as an earnings report, if you want to reduce slippage. Events of this kind can drastically alter markets and cause price fluctuations.

Instead, put in limit orders.

Limit orders are transactions that will only be fulfilled at a specific price or above, whereas market orders must be completed as soon as feasible. A limit order will help you stay away from negative slippage. But there’s also a chance the order will be carried out elsewhere.

On some platforms, investors may make an order and indicate in percentage terms the maximum amount of slippage they are ready to take.

What does cryptocurrency slippage mean?

There is a chance of slippage with any asset type. Cryptocurrencies could be more feasible since the market for them is often more erratic and, in certain situations, less liquid.

A 2% Slippage: What Is It?

Investors may choose a maximum slippage tolerance with some brokers. A 2% slippage occurs when an order is executed at a 2% higher or lower price than anticipated. For instance, there would be a 2% negative slippage if you ordered shares in a business at $100 a share and ultimately paid $102 for them.

Positive Slippage: Is It Good?

Positive slippage is beneficial, yes. It indicates that you received a better deal than anticipated.

The Bottom Line: One aspect of investing is slippage, which occurs when a trade’s completed price differs from its requested price. The difference between bid and ask spreads might affect how long it takes to complete an order. This may happen in many types of markets, such as stocks, bonds, currencies, and futures, and it tends to happen more often in volatile or less liquid markets.

Generally, trading in markets with high liquidity and low price volatility will reduce slippage. Additionally, it may benefit investors. Negative or positive slippage is possible. Negative slippage is the reverse of positive slippage, which indicates the investor is receiving a lower price than anticipated.

Conclusion

• Any circumstance when a market player obtains a different deal execution price than expected is called “slippage.”
• When an exchange or another market maker requests and executes a market order at a different time, the bid/ask spread shifts, a phenomenon known as slippage.
• All market venues, such as stocks, bonds, currencies, and futures, experience slippage.
• There are three possible outcomes for the final execution price: positive slippage, no slippage, or negative slippage compared to the planned execution price.
• Investing in quiet, liquid markets, avoiding late-day transactions, and using limit orders may reduce slippage.