Slippage refers to the difference between the stated price and actual price at which an asset is transacted. Price slippage is used primarily in the securities markets, where it refers to the difference between a price seen or quoted on the screen and the actual price that a buyer or seller receives in a transaction.
Slippage can be minimal or substantial, depending on various factors. These include:
Liquidity and Depth of the Market A market that transacts infrequently will have very high slippage costs. A highly liquid market with many buyers and sellers at nearby levels to the current quoted price will have low slippage.
Time of the Transaction A transaction which is executed overnight, on a weekend, holiday, near a contract rollover period, or at the market open or close will tend to have high slippage costs. Market liquidity and depth changes over time, making transaction timing important.
Order Size Huge institutional orders from mutual funds, hedge funds, investment banks, pension funds, and governments can suffer from extreme slippage costs. These orders are often sent through order-routing technologies (either across different execution platforms or different execution times) to minimize market impact. The typical small retail order will have very small (or no) slippage in liquid markets.
Speed of Market Action In fast-moving volatile markets slippage is higher than when the market is more predictable with buyers and sellers congregated around the same level. This is why slippage is high at the market open and close when volatility is highest.
Latency Between Order Send, Receipt and Execution All orders take some time between the moment they are sent by a buyer or seller and the moment they are recorded in an execution system. Although today's Internet-based transaction systems are ultra-fast, there is still a time lag between when the buy or sell button is clicked and when the transaction is completed. Prior to today's all-electronic markets this was a major issue as orders were transacted verbally, by fax and telephone, and (before that) letters, messenger and private wire. Latency is also a minor issue in the quotation systems themselves, as it takes a small amount of time to post the latest bid-ask prices (even if the system is "real time").
