Understanding Slippage with Examples — The Difference Between Expected Price and Fill Price
"I meant to buy at $10.00, but it filled at $10.05?" Even this small difference has a name: slippage.
What Is Slippage
Slippage is the difference between the fill price you expected when placing an order and the actual fill price.
When you place a market order saying "buy right now," it fills not at the price shown on your screen but at the price of the quantity actually being offered for sale at that moment. If the price moves even slightly in between, or if there is not enough quantity at that price, it fills at a price different from the one you expected. That difference is slippage.
Slippage can go unfavorably (more expensive when buying, cheaper when selling) or, rarely, favorably. However, at moments of high volatility, the unfavorable direction is more common.
Why It Happens: Volatility and Liquidity
There are two main causes of slippage.
First, volatility. When the price swings sharply, such as right after important news or an indicator release, the price moves even in the instant you place the order, so the fill price diverges from your expectation.
Second, liquidity. If the quantity sitting at that price is not enough to fill your order, the remaining order rolls over to the next, less favorable quote and fills there. The lower the trading volume of a stock, the worse this phenomenon is.
How to Reduce Slippage
You cannot eliminate slippage entirely, but you can reduce it.
Using a limit order lets you pin down "I will only buy at this price or lower" and prevent unwanted fills. In exchange, you have to accept that it may not fill if the price does not reach that level.
Also, avoiding the aftermath of a highly volatile release and trading in pieces in actively traded stocks and hours reduces slippage. It helps to remember that the habit of hurriedly chasing with market orders enlarges slippage the most.
Preguntas frecuentes
Q. Are slippage and the bid-ask spread the same thing?
Similar but different. The bid-ask spread is the "fixed difference" between the buy and sell quotes, while slippage is the "difference that actually occurred" when you place an order and it fills away from the expected price due to price movement or insufficient quantity. When the spread is wide, slippage tends to be larger too.
Q. Does using a limit order eliminate slippage entirely?
A limit order greatly reduces slippage by preventing fills at unwanted prices. However, if the quantity does not reach your specified price, it may not fill at all, so a "missed-trade (unfilled) opportunity cost" can arise instead.
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