Understanding Slippage with Examples — The Difference Between Expected Price and Fill Price

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.

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.

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.