"Slippage is the price you pay for order execution when the market moves quickly. It is the difference between the expected price and the actual executed price."
In-Depth Definition
Slippage occurs when the price at which you wish to buy or sell an asset is different from the price at which the order is actually executed. This phenomenon is common in volatile markets, during important economic announcements, or when liquidity is low. It manifests itself primarily in two ways: a higher purchase price than expected or a lower selling price than expected. The larger the size of the order, the higher the risk of slippage, as it takes longer to find counterparties willing to execute the entire order at the desired price.
Slippage can have a significant impact on the profitability of a trade. For example, if you want to buy a stock at €100 and the order is executed at €101 due to slippage, your acquisition cost is higher. Similarly, if you want to sell at €100 and the order is executed at €99, your profit will be reduced. Understanding and managing slippage is therefore crucial for effective risk management and optimal order execution.
StarQuant Insight
StarQuant's AI can help anticipate slippage by analyzing real-time market data (volatility, liquidity, order book depth) and predicting the impact of macroeconomic events. It can also optimize order routing to minimize slippage, by choosing the best execution venues and order types (stop orders, limit orders). Finally, it can continuously monitor order execution and alert the user in the event of excessive slippage.
Pro Tip
Use limit orders instead of market orders if you want to control the execution price, even if it means your order might not be executed. Closely monitor the spread (the difference between the buying price and the selling price) and avoid trading during periods of low liquidity or important economic announcements to minimize slippage.