How slippage happens
Slippage has two causes. The first is depth: a market order larger than the quantity at the best price fills against successively worse levels of the order book. The second is time: the market moves between the moment a price is shown and the moment the order is matched.
Take a book that offers 1 unit at 100 and 1 unit at 102. A market buy for 2 units pays 101 on average, 1% more than the quoted 100.
On a decentralised exchange that prices from a liquidity pool, the trade itself moves the price along the pool's formula. The user sets a slippage tolerance, beyond which the transaction fails.
How platforms limit slippage
- Limit orders, which cap the price and may not fill
- Price bands that stop a market order at a set distance from a reference price
- A quote held for a few seconds, as on-ramps and OTC desks give
- Splitting a large order over time or across venues
- A preview of the estimated average price before confirmation
For an operator, slippage is a measure of the quality of its market. A broker or on-ramp that quotes a fixed price takes the slippage onto its own book, and prices that risk into its spread.
Slippage, spread or fee?
- Bid-ask spread
- The gap between the best buy and sell prices, paid even by the smallest order. Slippage is what a larger or slower order pays on top.
- Trading fee
- Charged by the platform and shown separately. Slippage is a worse price, not a charge, and goes to the counterparty.
Where Slippage shows up in a platform
Modules that do the work
- Matching engineA low-latency order book for spot markets, with market makers and outside liquidity.
- Market dataLive and historical prices for crypto, stocks and FX, from the data vendors you choose.
- FXCurrency conversion with live rates, your margins and the liquidity provider you choose.