Slippage
What Is Slippage?
Slippage occurs when a trade executes at a different price than the price expected when the order was placed. This difference typically happens during periods of high volatility or low liquidity.
Slippage can occur with both buy and sell orders.
Why It Matters
Slippage can increase trading costs and reduce expected investment returns. Traders often monitor slippage when executing large orders or trading in fast-moving markets.
Understanding slippage helps investors manage trade execution and risk.
How Slippage Works
Slippage often occurs because prices change between the time an order is placed and when it is executed.
Factors that increase slippage include:
- high market volatility
- low liquidity
- large order sizes
Market orders are more susceptible to slippage than limit orders.
Example
An investor places a market order to buy a stock at $100. If the next available price is $100.30, the order executes at that price, creating $0.30 of slippage.
Slippage vs Bid-Ask Spread
- Slippage is the difference between the expected trade price and the executed price.
- Bid-ask spread is the difference between the highest bid and lowest ask in the market.
FAQs About Slippage
Can slippage be positive?
Yes. Sometimes a trade executes at a better price than expected.
How do traders reduce slippage?
By using limit orders and trading in liquid markets.
Is slippage common?
Yes, especially in volatile markets or when trading large orders.
Related Terms
