Slippage

1. Definition

Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. * It represents a hidden transaction cost, often occurring during periods of high volatility.

2. When does it happen?

It typically happens when using Market Orders.

1. Fast Markets: Prices change faster than the order can be processed. You see $100 on the screen, click "Buy," but fill at $102 because the price jumped in milliseconds.
2. Thin Markets (Low Liquidity): There isn't enough volume at the current price to fill your entire order, so the system moves up the order book to fill the rest at higher prices.

3. Physics Analogy

Think of it as "Friction" or "Reaction Lag." * In an ideal vacuum (theory), you stop exactly where you want. * In reality (market), momentum and lack of friction (liquidity) cause you to slide past your target point.

4. How to Avoid

• Use Limit Orders: Set a maximum price you are willing to pay.
• Avoid Market Orders: Especially in illiquid markets like OTM options or penny stocks.
• Check the Spread: If the Bid-Ask spread is wide, slippage is almost guaranteed.