Slippage

Slippage occurs when there is a disparity between a trade’s anticipated price and its actual execution price. This phenomenon is commonly observed during periods of high market volatility or when using market orders, especially if order size exceeds the available volume at the desired price. Since market prices can shift rapidly, slippage can occur within the time it takes to process an order.

Slippage is a recognised occurrence across various trading platforms, the specific circumstances can vary depending on the trading environment. 

Employing a limit order can mitigate the risk of undesirable slippage by setting a maximum or minimum execution price; however, this strategy risks the order not executing at all if market prices do not return to the set limit.

Importantly, slippage is neither inherently negative nor positive; it merely reflects any variance between the expected and actual prices. Depending on the market conditions and how the order is executed, this variance can result in outcomes that are better, worse, or equivalent to the anticipated price. Ultimately, the difference between the final and intended prices may lead to positive, negative, or no slippage at all.

Example of negative slippage:

Imagine the bid/ask prices for Tesla shares are displayed as $140.30/$140.35 on the trading platform. An investor decides to buy 50 shares at the market rate, aiming for the $140.35 ask price. But just as the order is about to be executed, rapid trading by automated systems shifts the bid/ask prices to $140.36/$140.41. As a result, the order is completed at $140.41 per share, leading to a negative slippage of $0.06 per share, which totals $3.00 for all 50 shares.

Example of positive slippage: 

Imagine a forex trader looking to buy EUR/USD, noting the current quote at 1.1050/1.1052. The trader then decides to enter a market order hoping to purchase at 1.1052. Just as the order is submitted, favourable market news leads to a rapid appreciation in the EUR against the USD, briefly pushing the ask price down to 1.1048 before stabilising. The market order, benefiting from this sudden dip, is executed at the lower ask price of 1.1048, resulting in positive slippage of 0.0004 per unit. For a trade of 10,000 units, this positive slippage saves the trader $4.00.

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