In plain terms — Slippage measures how far the average price actually obtained differs from the price chosen as a reference. Unless the benchmark price and time are specified, the number cannot be verified.
Slippage is an execution difference. For a purchase, it is often expressed as average executed price minus reference price; for a sale, the sign is reversed so that a positive value represents a cost.
buy slippage = average executed price − reference price
sell slippage = reference price − average executed price
Slippage can be adverse or favourable. An order may receive price improvement, while in a fast market it may execute at a worse price. Slippage therefore does not necessarily mean a loss, broker error or manipulation.
Which reference price?
Common measures use different references:
| Benchmark | Question answered |
|---|---|
| bid/ask quote on receipt | how far does the fill differ from the liquidity displayed when the order arrived? |
| midpoint | how far is the fill from the centre of the quote? |
| arrival price | how much did implementation change from the decision or arrival time? |
| signal price | what did it cost to turn a recorded signal into a trade? |
| interval VWAP | how does execution compare with trades during the period? |
No benchmark is universally best. A backtest often uses the bar or signal price; a transaction cost analysis may use more granular timestamped quotes. The comparison must retain the feed, time zone, latency and rounding rules.
Why the price can change
The market continues to evolve after an order leaves the interface. The observed difference may reflect several factors:
- available quantity smaller than the order size;
- quote changes during transmission and routing;
- execution across several levels of the order book;
- volatility and liquidity cancellations;
- delay between signal, submission and receipt;
- rules of the order type or venue;
- impact generated by the order itself.
A market buy order, for example, may receive fills at several asks. Its average price must be weighted by quantity. Once a stop order is triggered, it takes on the behaviour of the child order specified in its definition; the trigger is not a guaranteed execution price.
Slippage, spread and market impact
The terms describe different objects.
| Term | What it describes |
|---|---|
| distance between the best bid and best ask at a given time | |
| Slippage | observed difference between benchmark and executed price |
| component of price movement attributable to the order itself | |
| Fee | explicit charge by a service or venue |
Crossing the spread may appear in slippage when the benchmark is the midpoint. Book walking may be predictable from displayed depth and, at the same time, contribute to the order's impact. To avoid double counting, the Transaction costs entry separates the components before adding them.
Measurement with partial fills
For an order executed in several parts:
average price = sum(fill price × fill quantity) / total executed quantity
The unexecuted quantity does not disappear from the analysis. It may represent an opportunity cost or residual risk, but should not be converted arbitrarily into price slippage. Cancellations and rejections must be recorded as distinct outcomes.
It is useful to segment results by:
- instrument and venue;
- time band and session;
- order type;
- size relative to depth or volume;
- volatility and market conditions;
- broker, routing path and feed.
An aggregate average can hide a tail of highly adverse executions. Median, percentiles and regime-specific distributions help describe risk without pretending it is stable.
Possible controls and their trade-offs
- A limit order controls the worst acceptable price if it executes, but may remain partly or wholly unexecuted.
- Reducing size may consume less depth, but changes the desired position.
- Splitting the order may contain visible impact, but increases exposure time to market movement.
- Avoiding unstable windows reduces some risks, but may forgo moments essential to the strategy.
- Improving infrastructure and routing may reduce controllable delays without eliminating price risk.
No procedure can therefore eliminate slippage, non-execution probability and market risk at the same time.
Common mistake — Applying a fixed percentage of slippage to every instrument and regime in a backtest without comparing it with actual executions. It is a modelling assumption, not a constant property of the market.
Sources
- U.S. SEC, Investor.gov — Executing an Order
- U.S. SEC, Investor.gov — Understanding Order Types
- SEC — Frequently Asked Questions: Rule 605 of Regulation NMS
- CME Group — The Market Environment for Trend Following