Slippage
What is Slippage?
Slippage is the difference between an expected or benchmark trade price and the price actually achieved, defined with a consistent sign and timestamp.
Execution analytics should preserve the sign convention visibly. A positive number can mean favorable or unfavorable performance depending on system design and trade direction. Reporting both money cost and signed basis points reduces ambiguity and makes purchases and sales comparable.
Choosing the benchmark
Expected price might mean the quote at decision time, midpoint at order arrival, previous close, volume-weighted average price, or model price. Each measures something different. Arrival-price slippage captures movement and execution after the order reaches the market, while implementation shortfall can include delays, partial fills, missed trades, fees, and opportunity cost from the investment decision.
Sources of slippage
Spreads, market impact, volatility, latency, routing, queue position, order type, size, and changing market prices contribute. Some movement would have occurred without the trade, while some is caused by it and can leak information. Favorable slippage is possible through price improvement or market movement, but a strategy should not rely on it without robust evidence.
Example
A manager decides to buy at a $100.00 midpoint and completes the order at an average $100.30, paying five cents of explicit fees. Price slippage is 30 basis points, while the measured implementation cost becomes 35 basis points if fees are included. If only half the order fills and price rises further, the unfilled opportunity cost also belongs in a broader shortfall measure.
Portfolio relevance
Small recurring slippage compounds and can erase a high-turnover strategy's simulated edge. Capacity falls as order size grows relative to liquidity. Rebalances, tax trades, and systematic signals should be evaluated net of realistic cost by asset and regime. Paper performance using midpoint or closing prices without delay usually overstates what an implementable portfolio could earn.
Practical analysis
Record decision, release, arrival, fill, and completion timestamps; order instructions; quotes; venue; and fees. Normalize cost in basis points and money, then segment by size, urgency, liquidity, volatility, and trader. Avoid judging execution from final price alone because market movement and opportunity cost matter. Guard against selecting only filled orders and omitting canceled or missed trades.
Sources and further reading
- Trade Execution: What Every Investor Should Know, U.S. Securities and Exchange Commission
- How Fees and Expenses Affect Your Investment Portfolio, Investor.gov, U.S. Securities and Exchange Commission