Slippage: Causes, Order Choices, and Ways to Limit Its Impact
Summary
The document explains slippage as the difference between an expected price and the execution price. It emphasizes the interaction between market movement and order transmission delay, arguing that fast price changes and network latency can make short-horizon strategies especially sensitive. Suggested mitigations include using strategies whose average gains and losses are larger relative to slippage, reducing latency, and avoiding periods of rapid movement such as major economic announcements.
It also compares market and limit orders across entries and exits. Limit orders can constrain execution price but may leave an order unfilled; stop orders that become market orders can prioritize leaving a losing position, while stop-limit orders can fail to execute as prices move away. Thin liquidity and unexpected news can worsen fills. These are practical explanations and illustrative examples, not measured estimates: the document’s simple latency-based formula omits other execution factors, and it gives no empirical slippage study. It notes that slippage can sometimes help depending on order direction and market movement.
Key ideas
- Slippage is the gap between the expected execution price and the actual fill price.
- Price movement during order transmission can make latency especially costly for short-horizon strategies.
- Limit orders constrain acceptable prices but can miss execution, while market orders prioritize filling.
- Stop orders may accept adverse fills to exit, whereas stop-limit orders may remain unfilled.
- Fast news events and thin liquidity can increase slippage, and the article provides no empirical estimates.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.