Market Friction

Market friction refers to the various obstacles and costs that prevent markets from operating with perfect efficiency. These include transaction fees, bid-ask spreads, slippage, and the time delay between the decision to trade and the actual execution.

In the context of digital assets, market friction also includes technical factors like blockchain latency and exchange-specific liquidity issues. These frictions create a wedge between the theoretical price of an asset and the price at which a trader can actually buy or sell it.

Understanding market friction is crucial for any trader, as it dictates the profitability of a strategy. Algorithms are designed specifically to navigate these frictions and minimize their impact.

By accounting for these costs, traders can make more realistic projections about their returns. Market friction is an inherent part of the trading landscape, and successful participants are those who manage it most effectively.

It is a key factor in the design of both protocols and execution systems.