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Slippage

Slippage

Slippage occurs when a trade is executed at a price different from the expected price due to market volatility or delays in order execution. It is common in fast-moving markets where the price of a security can change rapidly between the time an order is placed and when it is executed. Slippage can result in higher transaction costs or reduced profits, especially in high-frequency trading environments.

Example

An investor places a market order to buy shares at $50, but due to market volatility, the order is executed at $51, resulting in slippage of $1 per share.

Key points

• Occurs when a trade is executed at a price different from the expected price.

• Common in volatile markets or during periods of high order flow.

• Can increase transaction costs and affect trading profits.

Quick Answers to Curious Questions

Why does slippage occur more frequently in volatile markets?

Prices change rapidly in volatile markets, causing a difference between the intended price and the executed price.

How can traders minimize the impact of slippage?

Traders can use limit orders instead of market orders to set a maximum or minimum price at which they are willing to trade.

What role does slippage play in high-frequency trading strategies?

In high-frequency trading, slippage can significantly impact profits, as rapid price movements may lead to less favorable trade executions.

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