What is Slippage in Trading?


Slippage refers to the difference between the expected price of a trade and the actual price at which it gets executed. It commonly occurs in highly volatile markets, where prices can change rapidly between the time an order is placed and its execution.

Example: You intend to buy a stock at ₹50, but due to a sudden price surge, it executes at ₹51. The ₹1 difference is slippage.

Why Does Slippage Happen?

  • Market Volatility: Rapid price movements in volatile markets often result in orders being executed at unexpected prices.
  • Order Size: Large orders can experience slippage, especially in thin markets with limited buyers or sellers.
  • Execution Speed: The time between placing and executing an order can lead to slippage, particularly in fast-moving markets.
  • Order Type: The type of order market or limit impacts the likelihood of slippage.

Types of Orders and Their Impact on Slippage

Market Orders

Market orders execute immediately at the current market price. While they guarantee execution, they are prone to slippage in volatile markets.

Example: If you place a market order to buy a stock at ₹100 but the price surges to ₹105 during execution, you incur ₹5 in slippage.

Limit Orders

Limit orders execute only at a specified price or better. They reduce the risk of slippage but may result in unfilled orders if the price doesn’t meet the limit.

Example: A limit order to buy at ₹100 will only execute if the price reaches ₹100 or lower, avoiding unexpected price jumps.

Slippage Management and Minimization Techniques

  • Advanced Execution Settings: Use platform features to control execution relative to market conditions, such as choosing between last traded price (LTP) or the bid-ask average.
  • Stop-Loss Orders: Properly placed stop-loss orders can limit potential losses from slippage.
  • Timeout Settings: Configure your broker’s timeout settings to cancel unexecuted orders after a specified duration.
  • Tick Settings: Adjust tick settings to determine minimal price changes, enabling incremental adjustments in fast-moving markets.
  • Monitor Market Conditions: Keep an eye on liquidity and volatility to make informed decisions and avoid environments prone to slippage.

Real-World Example: Managing Slippage

Imagine you’re trading a highly volatile option:

  • You buy a put option at ₹100 with a stop-loss at ₹130.
  • The price surges to ₹140 due to market volatility, but the best seller’s price is ₹150.
  • With a market order, you might sell at ₹150, incurring significant slippage.

Solution: Use a limit order at ₹130 and advanced platform settings to minimize execution delays or set tighter tick sizes for better control.

Conclusion

Slippage is an inevitable part of trading, especially in fast-moving or illiquid markets. However, by using appropriate order types, advanced tools, and strategic planning, traders can significantly reduce its impact. Success lies in staying informed, adapting to market conditions, and maintaining a well-thought-out trading plan.


Frequently Asked Questions

1. What is slippage in trading?

Slippage is the difference between the expected trade price and the execution price, often caused by sudden market movements.

2. How can slippage be minimized?

Using limit orders, adjusting timeout settings, and monitoring market conditions can help minimize slippage.

3. Is a market order riskier than a limit order?

Market orders guarantee execution but are more prone to slippage. Limit orders reduce slippage risk but may remain unexecuted.

4. Why is slippage more common in volatile markets?

Volatile markets have large price fluctuations, increasing the gap between the desired trade price and the actual execution price.

5. Do advanced trading options reduce slippage?

Yes, options like timeout and tick adjustments provide better control over trade execution, reducing slippage's negative impact.