Slippage: Why the Execution Price Deviates from Expectations
Slippage is the difference between the expected price and the actual average execution price. It commonly occurs with market orders, large orders, market volatility, or insufficient liquidity. Understanding its causes and tolerance settings helps beginners assess execution costs and risks.
What Is Slippage
Slippage occurs when a trade’s actual average execution price differs from the price expected when the order was placed. It may increase or decrease transaction costs and is not necessarily unfavorable. Market orders must execute against the quotes currently available in the market, so deviations are more likely when prices change rapidly or the available executable quantity is insufficient.
Liquidity and the Bid-Ask Spread
The bid-ask spread is the distance between the highest bid price and the lowest ask price, and it is affected by liquidity and trading volume. When sufficient market orders are available, large trades can generally be completed at prices closer to expectations. When liquidity is low, an order may consume multiple price levels in succession, causing the average execution price to deviate from the initial quote.
Tolerance and Execution Trade-offs
Some decentralized exchanges and DeFi platforms allow users to set slippage tolerance, which limits the extent to which the actual execution price may deviate from the expected price. Tolerance that is too low may cause an order to be delayed or fail, while tolerance that is too high may accept a significantly unfavorable price. A balance is therefore needed between execution success and price protection.
Reducing Negative Slippage
Consider splitting large trades into smaller orders and prioritizing markets with better liquidity. Using a limit order can also specify that execution occurs only at a designated price or a better price, reducing unfavorable deviations. However, execution may be slower, and completion is not guaranteed. These methods can only reduce the impact; they cannot eliminate market changes entirely.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/slippage
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