Have you been in a situation where you bought an asset, but what you realized in return was higher than the price you placed the order?
This seldom happens in a highly volatile market or an illiquid market.
This is what is referred to as the Slippage Risk.
What is Slippage Risk
Slippage risk is the difference in price when an order is placed, and when it’s filled or executed.
This is common in market order types.
For instance:
Let's say BTC bid and ask prices are posted on the exchange interface as $21,000 and $21,050, respectively. A market order for 5 BTC is placed, with the intention of having the order filled at $21,050. Before the order is filled, micro-second transactions by computerized programs lift the bid/ask spread to $21,200/$21,250. It is then filled at $21,250, incurring a negative slippage of $200 per BTC.
Slippage risk can either be positive or negative.
Positive when it gets you a better buy price than expected.
Negative when it gets you a price that leads to loss.
How Does Slippage Risk Occur in the Market
Slippage risk occurs in two ways:
- Price Movement - This occurs when there’s a quick price movement in the market, so quick that it changes before your order is filled, thus giving you a different entry price.
- An illiquid Market - This is as a result of fewer people trading a particular asset having a gap between the buy and sell orders.
How to Avoid Slippage Risk
Since you now know what slippage risks are, how do you avoid it?
- Ensure to trade in a high liquidity market for swift execution for your orders.
- Making use of stop limit order types in a highly volatile market.
- Avoid trading in a highly volatile market.
Conclusion
When you place an order on an exchange, there is always a slight chance that your order will not get filled. This is called slippage. Your losses can reach hundreds and even thousands of dollars, depending on the market price difference between the bid and ask when your order gets traded
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