Slippage

What Is Slippage?

Slippage is the difference between the expected price of a trade and the price at which it actually executes. If you expect to buy a stock at $50.00 but your order fills at $50.05, the $0.05 difference is slippage. While the term usually refers to negative slippage (getting a worse price), positive slippage (getting a better price than expected) can also occur.

Slippage is an unavoidable reality of trading that affects the true cost of entering and exiting positions. It is particularly important for strategies with small profit targets, where slippage can represent a significant percentage of the expected gain.

Causes of Slippage

Market volatility is the most common cause. In fast-moving markets, prices change between the moment you decide to trade and when your order reaches the exchange and gets matched. Even milliseconds of delay can result in a different execution price.

Insufficient liquidity at the desired price forces orders to fill at worse levels. If you want to buy 1,000 shares but only 200 are available at the best ask, the remaining 800 shares fill at higher prices as your order sweeps through the book.

Order type directly affects slippage. Market orders are most susceptible because they prioritize speed over price. Limit orders eliminate negative slippage by definition (though they risk non-execution). Stop orders convert to market orders when triggered, making them vulnerable to slippage during fast moves or gaps.

Measuring and Managing Slippage

Slippage can be measured as the difference between the theoretical fill price (typically the mid-price or the quoted price at decision time) and the actual execution price. Tracking slippage across all trades reveals the true implicit trading cost and its impact on strategy profitability.

Slippage assumptions in backtesting are critical. A strategy that appears profitable with zero slippage may lose money with realistic slippage estimates. Including slippage in backtests (typically 0.01-0.05% for liquid stocks, higher for less liquid instruments) produces more realistic performance estimates.

For institutional traders, execution algorithms (VWAP, TWAP, implementation shortfall) are specifically designed to minimize slippage by breaking large orders into smaller pieces and executing them patiently over time.