What Is Slippage?
Slippage is the difference between the price a trader expected when placing an order and the price at which the order actually filled. It grows with order size, with how fast the market is moving, and with how thin the instrument is, and it is incurred on every execution regardless of outcome.
Slippage is the difference between the price you meant to trade at and the price you actually traded at. It is small, constant, and the most reliably underestimated number in most people’s results.
How it works
You see a price and send an order. Between those two moments the market continues to move, and the order reaches the venue slightly later than you decided.
A market order takes whatever is available. It fills against the best resting prices, and once those are exhausted it fills against the next ones, which are worse.
The average of those fills is your price. If it is worse than the quote you acted on, the difference is slippage - and it is the same arithmetic whether the trade later wins or loses.
The three things that make it worse
Size. An order larger than the displayed depth walks the book, and each level it consumes is a worse price than the one before it.
Speed. In a fast market the quote you saw may already be gone, so the fill is wherever the market has reached rather than where it was.
Thinness. In an instrument with little resting size, even a modest order reaches deep into the book, which is why liquidity filters matter more than almost any other screening rule.
A worked example
On this site’s shared series a round trip costs 0.0098, about 2% of a median bar range of 0.493. That figure is the floor - the spread alone, in a liquid market, with no adverse movement.
Add a fast market and the real number rises. The ninetieth-percentile bar on the same series is 1.101, more than double the median, and a fill during a bar like that can land anywhere inside it.
Now run a strategy that trades twice a day. That is roughly 500 round trips a year, each paying at least the floor, before a single decision is judged.
Compare it to one trading twice a month. Same market, same costs per trade, and a total cost roughly twenty times smaller - which is a difference in results produced entirely by frequency.
Where it hurts most
Stops are the classic case. A stop order becomes a market order when triggered, and it triggers precisely when price is moving quickly in the direction you did not want.
Gaps remove the level entirely. If price jumps past your stop between sessions, the fill is at the reopening price, which may be far beyond where the stop was placed.
Illiquid instruments compound it. Wide spreads, thin books and large gaps arrive together, because they are all symptoms of the same absence of participants.
And news events combine all three. The moment most people want to act is the moment at which acting is most expensive, which is not a coincidence but the same cause seen from both ends.
The original data
On this site’s shared series: median bar range 0.493, ninetieth percentile 1.101, largest bar 2.338. Direction runs average 2.01 bars with a longest of 11. A round trip costs 0.0098, about 2% of the median bar range.
Those three bar figures are the range a bad fill can occupy. A fill at the wrong end of a ninetieth-percentile bar is more than twice as costly as one at the wrong end of a median bar, and neither is visible in a results summary.
And the fee-drag measurement shows where small repeated costs end up: on this site’s figures, 75 basis points a year removes 20.2% of a thirty-year balance, while 5 basis points removes 1.5%. Slippage behaves the same way and is charged far more often.
Measuring and reducing it
Record the price you decided at. The only way to know your slippage is to write down the quote you acted on and compare it to the fill, trade by trade.
Then compare the total to your results. A year of fills measured against decision prices produces one number, and for active strategies that number is frequently larger than the edge being pursued.
Limit orders remove it at a price. A resting limit fills at your price or not at all, which trades certain cost for uncertain execution - a good trade for patient strategies and a poor one for urgent ones.
And size the order to the book. If your intended size is a large share of the displayed depth, the fill will be worse than the quote no matter what order type you use.
When it fails
The characteristic failure is a backtest run at the midpoint. The system looks profitable, it is traded live, and the results are worse in a way that is hard to attribute.
The gap is almost always execution. Every historical trade was assumed to fill at a price nobody was offering, and the more often the system trades, the larger the accumulated fiction - which is why fast strategies survive testing and fail in production more often than slow ones.
A second failure is assuming a stop guarantees a price. It guarantees an order, and the fill is wherever the market is.
A third is trading thin instruments on liquid-market assumptions, where the real cost is a multiple of the expected one.
A fourth is never measuring it, which leaves the largest controllable cost entirely unmonitored.
And a fifth is treating it as bad luck. It is a predictable function of size, speed and depth, and all three are decisions rather than accidents.
Related
Bid-ask spread covers the floor under every fill. Liquidity covers the depth that decides how far an order walks. And backtesting covers the test that omitting this cost invalidates.
Nobody tracks this and almost everybody is hurt by it. It never shows up as a line item - it arrives as a fill a few cents worse than the screen said, over and over. The traders who have a problem with it are usually the ones whose strategy depends on trading often, which is also the group least likely to measure it.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.