Slippage is the difference between the price you intend to book a trade at and the actual price your order is filled at. It is caused by the bid and offer prices of a financial instrument moving due to price volatility and illiquidity. It can be positive or negative and can occur in any market.
- If you place a buy order at $10.50 and the trade fills at $10.55, this price difference is the slippage. In this case the slippage is negative as your entry level was worse than you intended.
- Slippage can be caused by a variety of factors. These include price volatility causing the bid/offer spread to move between the moment a trade is instructed and the time it is executed.
- Slippage is more likely to occur in illiquid markets or when relatively large trades are booked. If the bid price in a market is $22.20 then an investor who books a sell trade will start filling their order at that price level. If the size of the sell order is greater than the amount of buying interest at $22.20, then the sell order will move to the next price levels, maybe which could be $22.15, $22.10, $22.05, and so on, until it is completed.
- The likelihood of slippage occurring can fluctuate over time – as market conditions change. The important thing to remember is that liquidity and volatility are key determinants of slippage and need to be factored in when choosing which markets to trade. Taking the equity markets as an example, slippage is more likely to occur when trading high volatility and illiquid small-cap and mid-cap stocks rather than large-cap stocks.
Slippage Meaning in Context
- To help define slippage in a more practical way, here is a simple example of what it might look like inside the eToro stocks trading hub:
- Example: The buy price for LivePerson Inc shares is $0.89 and you decide to buy 500 shares for a total cost of $445.00.
- You hit the “buy” button and lock in the order.
- However, between the time your buy order is submitted and reaches the market other traders have executed trades at the $0.89 price level and moved the active market price to $0.88. This means you actually paid $440.00 for 500 shares in LivePerson.
- This is an example of positive slippage in trading. The price you paid is better than you expected. However, prices can also go the other way.
- The price differences in this example may not be a huge issue because the number of shares being traded is fairly low. A price difference of 1 cent creates a total cash difference of $5 in the above example. However, if you were buying 5,000 shares, the slippage quickly becomes more significant, and the same amount of slippage would result in a $50 difference.
Learn More about Price Slippage in Trading
To learn more about Price Slippage, why it happens, how it impacts trading, and how you can mitigate against the risk of it occurring, visit the eToro Academy to learn more about slippage in trading.