Market Slippage
Market slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. It typically occurs during periods of high volatility or when there is insufficient liquidity to fulfill a large order at the desired price.
When a trader places a large buy order in a shallow market, the order consumes the available sell orders, pushing the price higher and resulting in a worse average entry price. This phenomenon is a direct consequence of market microstructure and order flow dynamics.
Slippage is a significant concern for large-scale investors and algorithmic traders who must account for it in their execution models. To mitigate slippage, traders often use limit orders or break large trades into smaller, incremental chunks.
Understanding slippage is vital for effective risk management and accurate performance tracking. It represents an implicit cost of trading that can erode profitability over time.