What is Slippage

Slippage, in the context of trading, refers to the difference between the anticipated price of an order and the actual price at which it is executed. This price discrepancy can occur due to market volatility, low liquidity, or the speed at which orders are processed. Slippage can be positive, where the execution price is better than expected, or negative, where the execution price is worse

This article breaks down the concept of slippage, its types, causes, and how traders can work around it to make better decisions.

Slippage occurs when the actual price of a trade differs from the expected price. It is more common in volatile markets or when executing market orders in low-liquidity conditions.

For example, if you place a buy order for a stock at ₹500, but the trade gets executed at ₹503, you have experienced a slippage of ₹3.

Slippage can be either positive or negative, depending on whether the trade is executed at a better or worse price than expected.

There are several factors that contribute to slippage during trade execution:

Market Volatility

When prices change rapidly, orders may be filled at different levels than initially expected.

Order Type

Market orders, which are executed at the best available price, are more prone to slippage compared to limit orders, which specify a maximum or minimum price.

Low Liquidity

When there aren’t enough buyers or sellers at a particular price level, orders may be executed at the next available price, leading to slippage.

Trading Volume

Low volume in a stock can mean larger price gaps between successive bids and offers, increasing the slippage risk.

Delay in Order Execution

Even a few seconds of delay in execution, often due to poor internet speed or server latency, can result in significant price differences.

Slippage happens when the execution price of a trade differs from the price you expected. This can occur due to market volatility, low liquidity, or lag between order placement and execution. It can go either way—yielding a better price (positive slippage), an exact match (no slippage), or a worse price (negative slippage) than anticipated. Using limit orders instead of market orders helps avoid negative slippage, though it may mean your order doesn’t execute at all.

Slippage is broadly categorised into three types:

Note: Positive slippage is rare but can occur in fast-moving, high-volume markets where favourable price movements happen quickly.

The formula to calculate slippage is:

Slippage = Actual Execution Price – Expected Price

If you expected to buy a stock at ₹100 but it got executed at ₹101.50, then:

Slippage = ₹101.50 – ₹100 = ₹1.50 (negative slippage)

If it was executed at ₹98.50:

Slippage = ₹98.50 – ₹100 = -₹1.50 (positive slippage)

Slippage can significantly affect short-term traders, especially those using strategies like scalping or intraday trading where even small price differences matter.

Increased Cost

Negative slippage adds to the cost of trade, reducing overall profitability.

Strategy Disruption

For automated or algorithmic traders, large or frequent slippage can deviate from intended strategy execution.

Risk Amplification

In volatile markets, consistent slippage can amplify trading risks and erode capital over time.

In Futures & Options trading, slippage becomes even more critical due to:

• Lower liquidity in certain contracts
  

• Wider bid-ask spreads
  

• Rapid time decay in options
  

Traders in derivatives markets often use limit orders or place trades during high-volume sessions to reduce slippage.

While slippage cannot be completely avoided, several measures can help reduce its impact:

Use Limit Orders

Limit orders help ensure that trades are only executed at a price you are comfortable with, avoiding major deviations.

Trade in Liquid Securities

Securities with high daily trading volume are less likely to experience slippage due to tighter spreads and consistent price discovery.

Avoid Trading During News Events

Market announcements often cause sudden price spikes or drops. Avoid trading at such times unless necessary.

Choose the Right Broker

Platforms with better infrastructure and faster execution times help reduce latency-based slippage.

Monitor Spread and Depth

Before placing trades, check the bid-ask spread and market depth to anticipate potential slippage levels.

While both slippage and spread affect your effective trade price, they are not the same:

Slippage is an important but often overlooked aspect of trading, especially for active traders and short-term investors. While it may seem like a small amount per trade, its cumulative impact can be substantial over time. Understanding slippage, its causes, and ways to manage it is vital for improving trade execution and optimising results.

By using appropriate tools and strategies, traders can reduce slippage and stay closer to their planned entry or exit prices.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.