Now how does this exactly happen?

When we look at our trading software and see a certain price, we decide to execute a trade and send it to the market. The order is then executed at the best possible price. Because many orders are constantly queued and sent to the market, some bids and asks are already filled, partly or completely, before our order arrives. In that case, our order will be, partly or completely, be executed at the next best price.

 

Negative and positive slippage

Slippage is often being considered as always being in our disadvantage. However, slippage can be as well in our advantage as disadvantage. When it’s in our advantage, we’ll call it positive slippage. Otherwise it’s negative slippage. And of course, there’s also the possibility of no slippage at all.

 

The importance of slippage

Is slippage important and we should keep it in mind constantly when trading? Well, in case of trading on sufficient liquid securities with small (non-institutional) share sizes, we should not bother.

However, if we trade with huge sizes compared to the securities liquidity, slippage might have a major impact on our fill price. Check beforehand the liquidity in the level II in relation to the order size you intend to trade with.

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Protection against slippage

There is one thing you can do to protect yourself from slippage: you can set your order with a limit price. In that case your order will not be executed with a price worse than that limit price. Be aware that in this case your order might partially or completely be not filled at all.

 

Remark

Slippage is a trading phenomenon that occurs where there is a bid and ask. Therefor slippage is applicable for stocks, bonds, currencies, futures and also cryptocurrencies.

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