Order Execution – Slippage Explained

Are you aware of any instances when orders were executed at a different price from your current stop-loss, take-profit or entry-level? Are you aware of the reason behind it? Is there something wrong with the platform? Mostly, slippage is easy to understand, but you may have questions if you're unfamiliar with it.

In the sections below, we present the information you might find useful if you are trying to understand why and when slippage occurs, as well as how to avoid it. In addition to learning how the orders work, you'll also be able to understand how the order flow works from the moment you click the execution button, to the moment it gets filled.  

Moving down the article, you will get the habit to stay aware of the following points in the market:

• Rollovers in the market
• Important news releases
• Market volatility
• Assets with low liquidity 
• Gaps over the weekend 

How do slippages work?

It is recognised as slippage when the actual price differs from the intended price. It may occur when the price of an order varies from the price requested. It is common to observe slippage under a variety of circumstances. 

Firstly, when the market does not have enough liquidity. The slippage is visible mostly during the session rollovers. As a result, markets worldwide lack liquidity, leading to the slippage in trading as counter orders may not be available at desired prices to fill execution requests during the period. 

Thin liquidity can also cause spreads to widen. In the financial world, session rollovers refer to the transition between the US and Asian sessions etc. Certainly, some minor financial institutions operate during that hour-long gap, like in Australia and New Zealand, but the liquidity during that time is very limited. 

It is also possible to observe slippage during session rollovers in low-liquid assets. These instruments fall into a category of minor and exotic forex pairs that do not have nearly the same liquidity as major forex pairs. Due to this very simple reason, such assets are more likely subject to slippages.  

Markets can be extremely volatile, even without major news releases. Bitcoin (BTCUSD), the most popular of all cryptocurrencies, is an excellent example. By using the term volatile market, it is clear that drastic price fluctuations within a short timeframe characterise it. 

Positive Slippage 

There is a positive slippage if a trade is executed (opened or closed) at a favourable price. 

The following two scenarios are possible:

When a decrease in the Ask price is experienced after clicking the Buy button, you profit. If the trigger price is below the price at which a buy order has been filled, you will get some breathing room. 

Secondly, when the Bid price increases while hitting a sell order. This occurs when you place a sell order that gets filled above the trigger price and allows you to make more money. 

It may have been apparent that the examples above only show orders at entry. Then what about orders to close out a position? Exiting a buy position technically means submitting a sell order. 

When you exit from a buy position, if the bid closes higher than you anticipated, you have received positive slippage. Similar steps apply to sell orders as well. 

Negative Slippage

Negative slippage can occur under the same circumstances as positive slippage. As an example, this may occur when a trader fulfils a long order at an unfavourable price. Negative slippage, however, can occur in two different circumstances: 

• If a buy order triggers at a certain price level and fills above the expected price, it can trigger this type of event. 
• A seller can also experience this if he places an order at a certain price and the price is filled below the expected price. 

In addition to the types of slippages described above, this can be one of the various reasons for this.

Liquidity providers match the order with their quotes, corresponding to market liquidity. If it takes an extended time for an order to reach the server, the slippage may vary. 

Instant vs. live execution 

An order can be executed in real-time using a live execution. Through a server, the order is transmitted from the trader's platform to the liquidity providers so they can match the order. However, it is possible by using a quote and re-transmit a confirmation to the trader's performance. 

Liquidity providers execute trades depending on the depth of market for a particular instrument. Hence, this live execution model should be evaluated in light of the depth of the market. 

As opposed to this, an instant execution model does not consider the liquidity providers or the market data. Typical demo accounts at most retail brokers provide the instant execution model in practice. 

The traders get the confirmation of trades instantly, without taking market depth into consideration or ordering books. It is a shortcut that is artificial rather than real-time market execution. 

Is Slippage Normal?

It is clear from the discussion above that slippage does not necessarily have to be a bad thing. It can be both a pleasant experience when it is positive, or frustrating when it is negative. Yes, it is possible to experience both positive slippage and negative slippage.

A widening spread, a significant news release, volatile markets, and low liquidity are the factors that bring slippage into play. Slippage is part of trading, it is normal within reason! If you have any concerns or questions about how your trade execution occurs, speak to the friendly Blackstone Futures support team.