What Is Slippage and How Does Slippage Work in Trade XN

 It’s the experience of not getting filled at (or even very close to…) your expected price when you place a market order or stop loss. This can happen because either: market price is simply moving too fast, the market is not liquid or you’re talking to an unmotivated broker. Slippage typically occurs in a very volatile market (such as when there is a systemic effect that causes the entire market, asset or currency to fall, creating a situation where there are no traders to purchase the position at a stop loss. Sometimes, it occurs because brokers fill the large trade orders of institutional traders first, and by the time they move to the smaller retail orders, the large demand on the asset created by the institutional orders has driven prices too far.

Slippage does not denote a negative or positive movement because any difference between the intended execution price and actual execution price qualifies as slippage. When an order is executed, the security is purchased or sold at the most favorable price offered by an exchange or other market maker. This can produce results that are more favorable, equal to, or less favorable than the intended execution price. The final execution price vs. the intended execution price can be categorized as positive slippage, no slippage, or negative slippage.

Market prices can change quickly, allowing slippage to occur during the delay between a trade being ordered and when it is completed. The term is used in many market venues but definitions are identical. However, slippage tends to occur in different circumstances for each venue.

Example of Slippage: One of the more common ways that slippage occurs is as a result of an abrupt change in the bid/ask spread. A market order may get executed at a less or more favorable price than originally intended when this happens. With negative slippage, the ask has increased in a long trade or the bid has decreased in a short trade. With positive slippage, the ask has decreased in a long trade or the bid has increased in a short trade. Market participants can protect themselves from slippage by placing limit orders and avoiding market orders.

For example, say Apple’s bid/ask prices are posted as $183.50/$183.53 on the broker interface. A market order for 100 shares is placed, with the intention the order gets filled at $183.53. However, micro-second transactions by computerized programs lift the bid/ask spread to $183.54/$183.57 before the order is filled. The order is then filled at $183.57, incurring $0.04 per share or $4.00 per 100 shares negative slippage.