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Slippage |
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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Slippage refers to a failure to meet expectation with regard to the execution of an order. The slippage represents the difference between a trader’s estimated transaction costs and the amount actually paid due to market conditions or poor execution by the broker. It reflects how an order’s fill price differs from the price level that was entered. For example, if a sell stop loss order was placed at 1465 in the E-Mini S&P future contract and the order was filled at 1464.75, one would have experienced 1 tick of slippage on the order.
A market order is an order to transact a pre-specified number of shares at market price, which will cause an immediate execution, but is subject to price impact. Therefore, if you use a market order, there is no slippage. If you use a stop order, then when the market trades at your price, your stop becomes a market order and it gets filled at the current market price. You have slippage because you have a target price but you do not get it.Your stop price triggers the market order and the price you get depends on the liquidity of the market, the bid/ask spread, the size of the order and the market volatility. Slippage is common on stop orders.
The more volatile the market, the bigger is the chance of slippage. The more liquid the market, the smaller is the slippage. In some cases, it may even happen that you get a good fill below your stop price. The only way to avoid slippage is through the use of limit orders. By doing that, you demand a specific price to the market. Of course, the drawback is that you might miss a good profit because your order does not find a counterpart for the transaction and prices run immediately in your desired direction. If you trade within a short-term time frame using limit orders, you have to expect not to be filled every time. Note that if this can be accepted when you open a position, not being filled on a limit order might really be a problem when you want to close your position. Close monitoring of the market action is then required to make the proper decision. If you want to make sure that you are out of a position when you want to be, you have to enter a market or a stop order and accept slippage as an extra cost to pay for the certainty of the execution.
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