Slippage and Liquidity Depth

Slippage occurs when the execution price of an order differs from the expected price, typically due to insufficient liquidity in the order book. In the context of derivatives and crypto, large orders can exhaust the available volume at the best bid or ask, forcing the trade to fill at progressively worse prices.

Liquidity depth refers to the total volume of orders available at various price levels. When depth is shallow, even moderate trades can cause significant price movement, effectively increasing the cost of the trade.

Arbitrageurs must monitor depth closely to ensure that their entry and exit sizes do not move the market against them. High slippage is a primary deterrent for automated arbitrage bots.

Effective market making requires deep order books to minimize this impact and ensure stable price discovery.