Who it's for — For those trading during times of high volatility, or those trading with large capital in illiquid markets.
Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed.
It is a physiological market phenomenon and exclusively affects aggressive orders (Market Orders and Stop Orders). When you "sweep" the book to enter or exit instantly, if there isn't enough liquidity at the best price, the system will fish at progressively worse prices until it fills your entire size. The average difference between the starting price and the final average entry price is the Slippage.
In simple terms — You want to buy 10 shares at $100 with a Market order. Unfortunately, there is only 1 for sale at $100. The system buys that 1 at $100, then 2 at $101, then 7 at $102. You spent $1016 in total. Your average entry price is $101.6. That $1.6 difference from the initial price you saw on screen is the Slippage.
The two main causes
- Low Liquidity (Illiquidity): If the market has a very wide Bid/Ask Spread and few orders on the book, even a normal size can "pierce" several price levels.
- High Volatility (Macro Events): During the release of economic data (like inflation or interest rates), Market Makers withdraw liquidity to defend themselves. The book empties. An order fired in those seconds will suffer huge slippage.
How to protect yourself
For retail traders, Slippage is almost exclusively a problem during extreme volatility. To protect yourself:
- Do not trade exactly on the minute of macroeconomic news releases.
- Use Limit Orders when possible (they don't suffer slippage, guaranteeing the price).
- Avoid "shitcoins" or penny stocks with non-existent trading volumes.
Summary Sheet
- Nature: An invisible cost of Market execution.
- Impact: Reduces net profit (or worsens the loss).
- Prevention: Limit orders and trading in high liquidity contexts.
Links
- market-order — The order that causes and suffers Slippage.
- liquidity — The factor that mitigates slippage.
- bronze-path
Module: Module 3 — Orders and Operations
Know what happens when you click buy or sell.
