Slippage refers to the difference between the expected price of a trade and the price at which the trade was executed. Slippage can occur at any given time but is mostly seen during periods where the markets are highly volatile, and when market orders are used.
It can also occur when a large order is executed but there isn't enough volume at the given price to be able to maintain the current buy/sell spread.
When does slippage occur?
Slippage refers to all situations in which a trader receives a different trade execution price than intended.
It can also occur when the buy/sell spread changes between the time a market order is requested and the time an exchange executes the order.
Slippage occurs in all markets. Stocks, Crypto, futures, equities and bonds.
So how does slippage work?
Slippage does not denote a negative or positive movement because any difference between the intended execution price and the actual execution price qualifies as slippage. When an order is executed, the asset is purchased or sold at the most favourable price offered by an exchange. This can produce results that are more favourable, equal to, or less favourable than the intended execution price. The actual execution price vs. the intended execution price can be categorized as positive slippage, no slippage, or negative slippage.
An example of slippage...
The most common way that slippage occurs is as a result of a volatile change in the buy/sell spread. For example, lets say BNB's buy/sell prices are posted as $183.50/183.53 on the exchange interface. A Market order for 100 BNB is placed, with the intention the order gets filled at $183.53. However, micro-second transactions by computerized programs lift the buy/sell spread to $183.54/183.57 before the order is filled. The order is then filled at $183.57, incurring $0.04 per BNB or $4.00 per 100 BNB slippage. This would then be seen as negative slippage.
A market order may get executed at a less or more favourable price than originally intended when this happens. With a negative slippage, the buy price has increased in a long trade or the sell price has decreased in a short trade. With a positive slippage, the buy price has decreased in a long trade or the sell price has increased in a short trade.
Trades can protect themselves from slippage simply by using limit orders and avoiding market orders.