Slippage refers to the difference between the expected price of an order and the price at which the order is actually executed.
When market prices move rapidly or liquidity conditions change, the price displayed when an order is submitted may no longer be available, or there may not be sufficient liquidity available at that price. As a result, the order may be executed at the next available market price, resulting in slippage.
Slippage may be more noticeable during periods of high market volatility or lower liquidity, for example:
- Major economic data releases: Market prices may move rapidly within a short period before and after the release of important economic data, such as the U.S. Non-Farm Payrolls (NFP) or Consumer Price Index (CPI).
- Market opening or reopening periods: Prices may change rapidly and liquidity may be relatively lower around the market open, which may result in the actual execution price differing from the expected price.
- Monday market open: Markets are closed over the weekend, while economic, political, or other significant market-moving events may still occur during this period. As a result, prices may reopen with a significant gap or experience rapid movements on Monday, increasing the possibility of slippage.
Slippage may be favorable or unfavorable to a trader. When the actual execution price is better than the expected price, this is known as positive slippage. When the actual execution price is less favorable than the expected price, this is known as negative slippage.