Definition
Slippage is the difference between the price expected when an order is placed and the average price at which the order actually executes.
Why slippage happens
Market prices can move while an order is being filled. A large market order can also consume several price levels in an order book or move through available liquidity in a pool. Low liquidity, high volatility and large order size can therefore increase the difference between the displayed price and the average fill.
Slippage can be positive or negative. The execution can be better or worse than expected, although traders usually focus on the downside risk of receiving a worse price.
Limits and order types
A slippage tolerance can stop an order or transaction when the price moves beyond a set boundary, but it does not guarantee a fill. A limit order controls the worst acceptable price but may remain unfilled. An agent should consider liquidity and order size before selecting either approach.
What it does not mean
Slippage is not the spread and it is not a trading fee. The spread is the gap between quoted bid and ask prices; slippage is the difference between expectation and execution.
Where this term fits
Questions about slippage
- Can slippage be positive?
- Yes. An order can execute at a better price than expected, although negative slippage is the case traders usually try to limit.
- Does a slippage tolerance guarantee execution?
- No. A restrictive tolerance can cause an order or transaction to fail when the market moves or available liquidity is insufficient.
- How is slippage different from spread?
- Spread is the gap between the quoted bid and ask. Slippage is the difference between the expected price and the average price actually received.
See these concepts in context
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