What is Slippage?
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed.
This typically happens when the market moves quickly between the moment an order is placed and when it gets executed.
Positive Slippage: Buying at a lower price or selling at a higher price than expected.
Negative Slippage: Buying at a higher price or selling at a lower price than expected.
Example of Slippage: Suppose a trader wants to buy a stock at ₹100 and places a market order. However, due to rapid price movement, the order gets executed at ₹103.
The ₹3 difference between the expected price and executed price is called slippage.
Why Does Slippage Happen?
Slippage occurs due to several market and execution factors.
- High Market Volatility
During major events such as economic announcements or sudden market moves, prices can change rapidly within seconds, increasing the chances of slippage.
- Low Liquidity
If there are not enough buyers or sellers at the desired price level, the order may get executed at the next available price.
- Large Order Size
Large orders may consume available liquidity at a specific price level, forcing the remaining quantity to execute at different prices.
- Market Orders
Market orders prioritize execution speed over price, which means the order gets filled at the best available price in the market, sometimes resulting in slippage.
- Slow Execution Infrastructure
Execution delays due to slow systems, poor connectivity, or unstable APIs can also increase slippage risk.
How to Avoid or Reduce Slippage?
While slippage cannot always be completely eliminated, traders can reduce its impact by following certain practices.
- Use Limit Orders Instead of Market Orders
Limit orders allow traders to specify the maximum price they are willing to buy at or the minimum price they are willing to sell at. This helps control execution price and reduce slippage.
- Trade Highly Liquid Stocks
Stocks or derivatives with higher trading volumes usually have tighter bid-ask spreads, reducing the chances of large price gaps.
- Avoid Trading During Extreme Volatility
Major announcements or market openings often experience rapid price movements, which increases slippage.
- Optimize Order Size
Breaking large orders into smaller orders can help improve price execution.
- Use Fast Execution Infrastructure
A broker with low latency infrastructure and fast order routing helps reduce execution delays and minimize slippage.
