In Finance, what is Slippage?

Slippage is a term in finance which describes a situation in which a stock or other financial instrument fails to trade at the expected price. There are a number of reasons why slippage can occur, and it can become a very serious problem for some traders. People can use a variety of techniques to avoid slippage or to reduce the risk of experiencing this unpleasant problem. Anticipating and managing differences between expected and actual prices is an important aspect of being a successful trader or broker.

When people write orders to sell things like stocks, they indicate the price they anticipate or expect for the sale. Sometimes, in the time it takes to write the order, the price drops, and slippage occurs. No one will fill the order at the expected price, and as a result, the order must be sold at the next available price, causing slippage. Brokers working on behalf of their customers want to avoid such situations, as they want to get the best deal possible for the people they represent.

Slippage usually occurs in response to market pressures. In any market which is fast or volatile, prices change quickly, and even experienced and skilled brokers may have difficulty keeping up. Markets can swing radically in response to things like breaking news, especially breaking financial news such as the release of new rate information from a central bank. Brokers must try to anticipate news events which might cause changes in the market so that they can be one step ahead.

A high volume of sales orders can also generate slippage. If numerous people are trying to sell a stock at a given price, buyers might start refusing that price and pressuring for a lower one. Subsequently, people who write sell orders at the higher price may not be able to sell before the price drops, and are thus forced to take a lower price.

Each broker or trader approaches the issue of slippage differently, depending on the market she or he is involved in, the needs of any clients that may be involved, and experience. Good traders and brokers are highly flexible, with the ability to anticipate changes and to adapt quickly to changes to take advantage of shifting market conditions. Failure to keep up can result in being stuck with the bad end of the deal, and in an extremely volatile market, it is possible to take quite large losses in a single day.