Slippage
Slippage is the difference between the expected price of a trade and the actual execution price, often caused by volatility or low liquidity.
What Is Slippage?
Slippage is the difference between the price you expect to pay or receive for a trade and the price at which the trade is actually executed. This gap can be positive or negative, but it typically erodes performance and increases trading costs. Slippage is common in all markets, such as equities, bonds, currencies, and futures, and is especially relevant in fast-moving or illiquid environments.
How Does Slippage Work?
Slippage occurs when there is a delay between placing a trade and its execution, during which the market price may change. Key contributors include market volatility, low liquidity, large order size, and execution delays. For example, if you place a market order during a volatile period or in a thinly traded security, the price may move before your order is filled, resulting in slippage. Both market orders and certain limit or stop orders can experience slippage, especially when price movements are rapid or trading volumes are low.
Why Is Slippage Important for Investors and Fund Managers?
Slippage directly impacts trading performance and profitability. Persistent negative slippage can raise concerns during operational due diligence and track record verification. For high-frequency or systematic trading strategies, even small amounts of slippage can significantly erode returns. Understanding and managing slippage is crucial for accurate performance measurement and effective risk management.
Example: Slippage in Practice
Suppose you intend to buy a stock at $50, but due to a sudden market move, your order is executed at $50.20. The $0.20 difference per share is slippage. In another scenario, a large order in a low-liquidity market may only be partially filled at the expected price, with the remainder filled at less favorable prices, increasing overall slippage.
When Should You Pay Attention to Slippage?
Slippage should be closely monitored:
During periods of high market volatility or major news events
When trading large orders or in less liquid markets
For high-frequency, algorithmic, or systematic trading strategies
As part of operational due diligence and performance analysis
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