Slippage and market impact

Slippage is the difference between the price you expected and the price you received. Market impact is the price movement your own trading causes. Together they are often the largest hidden cost in a trading strategy.

Where slippage comes from

• Latency: the market moves between the decision and the fill.
• Volatility: fast markets move further in the same amount of time.
• Size versus depth: an order larger than the size at the best price fills across several price levels.
• Order type: stops convert to market orders and fill wherever liquidity is.

Market impact

Large orders move prices. Part of that move, the temporary impact, fades after the order is done. Part of it, the permanent impact, remains because the trade has revealed information to the market. Impact grows with order size relative to typical volume, which is why institutions spend so much effort hiding and spreading their orders.

Implementation shortfall

Professional desks measure execution with implementation shortfall: the difference between the price at the moment the decision was made and the final average execution price, including all fees. It captures delay, slippage, impact and missed fills in one number, and it is a useful way for any trader to judge whether execution matches their expectations.

Educational content only. Not financial advice.