Negative Slippage occurs when the actual execution price of a trade is worse than the expected or quoted price at the moment the order was placed. This discrepancy results in an unfavorable outcome for the trader, reducing their realized profit or increasing their loss. It is a common phenomenon in fast-moving or illiquid markets, where prices can change rapidly between order submission and order fulfillment.
Mechanism
Negative slippage typically arises due to several factors: high market volatility, insufficient liquidity at the requested price level, or significant order size that consumes available bids or offers. When an order is sent to an exchange or liquidity provider, the market price may move against the trader before the order can be fully matched. The order then executes at the next available price point, which is less favorable. This difference represents the negative slippage, directly impacting transaction costs and overall trade profitability.
Methodology
Managing negative slippage is a critical component of trade execution strategy, requiring sophisticated algorithms and access to deep liquidity. Methodologies include using limit orders to ensure execution at a specific price, though this risks non-execution. Smart order routing systems are employed to access multiple liquidity pools and find the best available prices. For institutional crypto trading and request-for-quote (RFQ) platforms, minimizing slippage is paramount for achieving best execution. It requires robust infrastructure capable of high-speed order processing and dynamic liquidity sourcing to reduce the gap between anticipated and actual trade prices, thereby preserving capital and optimizing returns.
Slippage measurement differs in that firm liquidity is a direct analysis of execution vs. benchmark, while last look requires pricing the option to reject.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
