What is slippage and how can you avoid it?

What is slippage?

Slippage is when an order you’ve placed is filled or executed at a different price to the one you requested. The difference between the requested and actual execution prices can be either positive (ie positive slippage) or negative (ie negative slippage) depending on several factors, namely:

1. The direction of the movement in the market price

2. If you’re going long or short

3. Whether you’re opening or closing a position

Positive slippage is – as its name suggests – advantageous in trading, as it means that you’ll get a better price than what you expected. Conversely, negative slippage means that you could end up paying more for a position than you intended.

If negative slippage were to affect your positions, some brokers would still fill your orders at the worse price. Our best execution practices ensure that if the underlying asset’s price moves beyond our tolerance level between the time of you placing an order and when it’s executed, we’ll – rather than filling you at a worse price – reject the order. This protects you, to some extent, against the effects of negative slippage when opening or closing a position. However, if the underlying asset’s price were to move to a better position for you, we’d fill the order at that more favourable price.

Aside from this, there are other ways to protect yourself against slippage such as using limits or guaranteed stops on your active positions. Limits can help you to avoid slippage when entering or closing a position, as a limit order will only fill at the price that you’ve requested, while a guaranteed stop will close out your trade once the asset’s price hits the exact level you specified. A small premium is payable if a guaranteed stop is triggered.

How does slippage occur?

Slippage generally occurs when there’s low market liquidity or high volatility. This is because in low liquidity markets, there are fewer market participants to take the other side of a trade. So, more time is required to find a corresponding buyer or seller, which means there’ll be a longer time delay between when an order is placed and when it’s actually executed.

With this delay, an asset's price may change, meaning that you’ve experienced slippage. In volatile markets, price movements can happen quickly – even in the few seconds that it takes to fill an order.

Slippage tends to be prevalent around or during major news events. Announcements from central banks about monetary policy and interest rates, or a company earnings report, can all cause heightened volatility, which can increase your chances of experiencing slippage.

Some of these events, such as a change in CEO for instance, aren’t always foreseeable. Other events, such as major meetings of the Federal Reserve (Fed) or Bank of England (BoE), are scheduled – although it isn’t always clear what’ll be announced thereafter.

Example of slippage

Let's say you want to go long on Microsoft shares when the price is £300 per share. You place a market order to buy 100 contracts for difference (CFDs). However, due to high volatility following a positive earnings report, the price of Microsoft shares jumps quickly. By the time your order is executed, the best available price is £300.50. Your order is filled at £300.50 instead of £300. This difference of £0.50 per share is the slippage.

Calculation:

• Intended entry price: £300

• Actual entry price: £300.50

• Slippage per share: £0.50

• Number of CFDs: 100

• Total slippage: £0.50 x 100 = £50

In this case, you've experienced £50 worth of negative slippage on your trade. This means you’ve entered the position at a slightly less favourable price than intended, which could affect your potential profit or loss on the trade.

Learn more about ways to trade: spread betting and CFD trading