Slippage and Impact Costs

Slippage and impact costs refer to the difference between the expected price of a trade and the actual price at which it is executed. Slippage occurs when there is insufficient liquidity at the desired price, forcing the order to be filled at less favorable levels.

Impact cost is the broader effect that a large order has on the market price, pushing it away from the initial quote. Both are significant concerns for traders, especially in markets with low liquidity.

High slippage can turn a profitable trade into a losing one, so minimizing it is a key goal of effective execution. Traders use various strategies, such as splitting large orders into smaller ones or using limit orders, to manage these costs.

In the context of derivatives, slippage can also lead to premature liquidations if a trader is forced to exit a position at a bad price. It is a fundamental concept in understanding the real-world cost of trading.