Slippage
Slippage is the difference between the expected price of a trade and the actual execution price. This cost occurs because markets are constantly moving, and the price you see when you decide to trade may not be the price you receive when your order actually executes. Understanding slippage helps you manage trading costs and set realistic expectations about trade outcomes.
While slippage often carries a negative connotation, it can work in your favor if prices move favorably between order submission and execution. More commonly, however, slippage increases trading costs, particularly for large orders, during volatile markets, or when trading illiquid securities.
What Is Slippage?
Slippage represents the difference between your intended execution price and the actual price received. If you submit a to buy a stock quoted at $50.00, but it executes at $50.05, you experienced $0.05 of slippage. The quoted price moved before your order reached the market.
Think of it this way: Slippage is like trying to buy an item at a store with a price tag showing $50, but when you reach the register, the price has increased to $50.05 because demand surged in the seconds between seeing the price and paying. In fast-moving markets, prices change rapidly enough that what you see isn't always what you get.
Slippage affects all traders but impacts active traders, large institutional orders, and illiquid security trades most significantly. A few cents of slippage per share multiplied across thousands of shares and hundreds of trades can substantially reduce returns.
Types of Slippage
Slippage manifests in different forms depending on the cause and direction of price movement.
Positive Slippage
Positive slippage occurs when execution price improves compared to your expected price. If you enter a market order to buy at the displayed ask price of $50.10, but your order fills at $50.05, you saved $0.05 per share. This typically happens when prices move favorably during the brief delay between order submission and execution, or when your broker provides .
While less common than negative slippage, positive slippage can reduce overall trading costs. Many brokers actively seek price improvement by routing orders to venues offering better prices than the .
Negative Slippage
Negative slippage occurs when execution price worsens compared to your expected price. If you try to sell at the displayed bid price of $50.00, but your order fills at $49.95, you lost $0.05 per share to slippage. This typically results from prices moving against you during order transmission or insufficient at your target price level.
Negative slippage is more common than positive slippage because market orders consume liquidity, requiring immediate execution often at progressively worse prices when available shares at the best price run out.
Causes of Slippage
Several factors contribute to slippage, with some more controllable than others.
Market Volatility
During periods of high , prices change rapidly. A security that was bid at $50.00 when you decided to sell might drop to $49.90 by the time your order reaches the market milliseconds later. Major news events, earnings announcements, or market crashes create conditions where slippage can be substantial because prices move significantly in seconds.
Limited Liquidity
Thinly traded securities have fewer shares available at quoted prices. If the order book shows 100 shares bid at $50.00 and you try to sell 1,000 shares, the first 100 might fill at $50.00, but the remaining 900 shares must find buyers at lower prices—perhaps $49.95, $49.90, or worse depending on available demand.
Large-cap stocks like Apple or Microsoft have deep order books with millions of shares available at incremental price levels, minimizing slippage even for sizable orders. Small-cap or have shallow order books where modest orders can experience significant slippage.
Order Size
Larger orders consume more liquidity from the order book. If you want to buy 100 shares when 1,000 are offered at the ask price, your entire order fills at one price. If you want to buy 10,000 shares when only 1,000 are offered at the ask, the remaining 9,000 shares must fill at progressively higher prices as you move up through the order book.
This relationship between order size and slippage creates challenges for institutional traders managing million-share positions. They often break large orders into smaller pieces executed over time to minimize market impact and slippage.
Execution Speed
The time delay between order submission and execution creates opportunity for prices to move. Orders routed through slower systems or networks experience more time for prices to change. This explains why firms invest heavily in fast connections and proximity to exchange servers—reducing latency reduces slippage risk.
Bid-Ask Spread
The bid-ask spread creates guaranteed slippage for market orders. If a stock has a bid of $50.00 and ask of $50.10, buying at the market costs you the $0.10 spread immediately. Wider spreads create more slippage—liquid stocks might have $0.01 spreads while illiquid securities can have 1-5% spreads.
Measuring Slippage
Quantifying slippage helps you assess trading costs and compare execution quality across brokers or strategies.
Basic Calculation
Slippage is simply the difference between your reference price and actual execution price:
For buys:
For sells:
Example:
You place a market order to buy 500 shares when the stock shows:
- Bid: $50.00
- Ask: $50.10
Your order fills at an average price of $50.15.
Percentage Slippage
Expressing slippage as a percentage helps compare impact across different price levels:
Using the example above:
This percentage allows meaningful comparisons—a $0.10 slippage on a $10 stock (1%) is far more significant than $0.10 slippage on a $100 stock (0.1%).
Minimizing Slippage
While you can't eliminate slippage entirely, several strategies reduce its impact on your trading results.
Use Limit Orders
specify the maximum price you'll pay (for buys) or minimum price you'll accept (for sells). If you place a limit order to buy at $50.10, you won't pay more even if the market moves higher. The tradeoff is execution risk—if prices move away from your limit, your order might not fill.
Limit orders work best for:
- Trading less liquid securities where slippage risk is high
- Non-urgent trades where you can wait for your price
- Volatile markets where prices swing rapidly
- Larger orders that might move the market
Break Up Large Orders
Instead of submitting one 10,000-share market order that exhausts liquidity at multiple price levels, consider breaking it into ten 1,000-share orders executed over time. This approach trades execution speed for better average prices by allowing the market to replenish liquidity between order chunks.
This strategy works particularly well for institutional-sized orders in moderately liquid securities. The downside is execution risk if prices move against you between order pieces, and the time/attention required to manage multiple orders.
Trade During Peak Liquidity Hours
Slippage is typically lowest during peak trading hours (10:00 AM - 3:00 PM ET for U.S. markets) when is highest. Avoid trading at market open (9:30-10:00 AM ET) or close (3:30-4:00 PM ET) when volatility increases spreads, or during low-volume periods like lunch hour when thin liquidity exacerbates slippage.
After-hours trading particularly suffers from wide spreads and shallow liquidity, making slippage unpredictable and often substantial. Unless circumstances require immediate execution, wait for regular trading hours.
Choose Liquid Securities
When possible, trade highly liquid securities with tight spreads and deep order books. Large-cap stocks, major ETFs like SPY or QQQ, and actively traded options typically offer minimal slippage. Small-cap stocks, obscure ETFs, and illiquid options can have slippage that exceeds any potential gains from the trade itself.
Check average daily and typical spreads before trading. Securities with over 1 million shares of daily volume and spreads under 0.1% generally offer good liquidity for retail-sized orders.
Select Quality Brokers
Broker quality significantly affects slippage. Reputable brokers actively seek price improvement through smart order routing that checks multiple venues for best prices. They also typically have better technology infrastructure reducing latency between order submission and execution.
Review your trade confirmations to see actual execution prices versus quoted prices when you submitted orders. Consistently poor execution quality relative to quotes suggests investigating alternative brokers.
Slippage vs. Spread
While related, slippage and spread are distinct trading costs that often get confused.
The bid-ask spread is the standing difference between bid and ask prices, representing the cost of immediately buying at the ask or selling at the bid. The spread exists constantly whether you trade or not, visible in every quote.
Slippage is the additional cost beyond the spread caused by price movement between decision and execution, or by your order consuming liquidity beyond the best quoted price. Slippage is variable and depends on market conditions, order size, and execution speed.
Example: A stock quotes at $50.00 bid / $50.10 ask:
- The spread is $0.10
- If you buy at the market and fill at $50.10, you paid the spread but experienced zero slippage
- If you buy at the market and fill at $50.15, you paid the $0.10 spread plus $0.05 of slippage
Both costs reduce your returns, but they have different causes and solutions. Reducing spread costs involves choosing liquid securities and potentially using limit orders to capture the midpoint. Reducing slippage requires order sizing, timing, and execution strategy.
Slippage in Different Market Conditions
Market conditions dramatically affect slippage magnitude and predictability.
Bull Markets: Orderly uptrends typically feature moderate volatility and good liquidity, minimizing slippage. Buy orders might experience slight positive slippage as prices trend higher, while sell orders face modest negative slippage.
Bear Markets: Panic selling creates one-sided markets with thin buying interest. Sell orders often experience substantial slippage as bids evaporate and only lowball offers remain. The 2020 COVID crash saw slippage of 5-10% on certain trades as markets gapped down repeatedly.
Range-Bound Markets: Sideways markets with low volatility usually offer minimal slippage. Liquidity remains balanced, and prices don't move dramatically between order submission and execution. These conditions are ideal for minimizing transaction costs.
High Volatility Events: Earnings announcements, Fed decisions, or geopolitical shocks create volatile conditions where slippage can be extreme and unpredictable. Market orders during these events might fill far from quoted prices as order books thin out and prices gap rapidly.
Key Takeaways
Slippage is the difference between expected and actual execution prices, caused by market movements between order submission and execution, or by orders consuming available liquidity at progressively worse prices.
Primary causes include market volatility that moves prices rapidly, limited liquidity in thin order books, large order sizes that exhaust available shares at quoted prices, execution delays that allow prices to change, and inherent bid-ask spreads that guarantee some execution cost.
Measuring slippage in both dollar terms and percentages helps assess trading costs and compare execution quality across brokers, with percentage calculations enabling meaningful comparisons across different security price levels.
Minimizing slippage involves using limit orders for price control, breaking large orders into smaller pieces, trading during peak liquidity hours, choosing liquid securities with tight spreads, and selecting quality brokers with smart order routing and fast execution systems.
Slippage differs from spread—the spread is the standing cost of immediately trading at bid or ask, while slippage is additional cost from price movement or liquidity consumption beyond quoted prices. Both reduce returns but have different characteristics and mitigation strategies.