Slippage

Key points

• Slippage is the difference between the expected price of a trade and the price at which it is actually executed.
• It happens when the available liquidity is not enough to fill the order at the expected price, common in shallow or highly volatile markets.
• The larger the order relative to market liquidity, the greater the slippage tends to be, which raises the effective cost of the trade.

What is slippage?

Slippage is the deviation between the price the user saw when submitting an order and the average price at which it ended up being executed. In markets with low liquidity or during moments of strong price swings, the price can change between the moment of the decision and the moment of execution, or the order may consume several price levels before being fully filled.

How it works

On an exchange with an order book, a market order starts executing at the best available price and works its way down through the following levels until the full quantity is filled. If the book is shallow, those levels are far apart, and the final average price ends up worse than the top of the book. That difference is slippage.

In protocols that use liquidity pools, the effect is similar: each unit purchased shifts the pool's proportions and makes the next one more expensive, so large orders in small pools suffer more price impact. To protect against this, many platforms let users set a maximum slippage tolerance, and the trade is cancelled if the price moves past that limit.

Slippage tends to worsen during periods of high volatility and low liquidity, when both factors compound each other.

Why it matters

Slippage is part of the real cost of trading, alongside fees, and it tends to be underestimated. A company that needs to convert a large amount at once can reduce this cost by splitting the order into parts, choosing more liquid markets, or setting a tolerance that avoids very unfavorable executions.

Risks and limitations

Setting a very low tolerance protects the price but increases the chance the order won't execute; a very high tolerance exposes the trade to unfavorable executions. In shallow markets, slippage can make larger trades impractical. Certain attacks specifically exploit orders with loose tolerance to deliberately worsen the execution price. In short, slippage is the price of urgency in markets without sufficient depth. Monitoring market depth before submitting an order helps estimate the expected slippage and choose the best time to trade.