Slippage

Slippage occurs when an order is executed at a price that differs from the price that was requested. The discrepancy between the anticipated fill price and the actual fill price is referred to as “slippage.” Whenever an order is filled at a price that is not the one requested, it is classified as slippage. Slippage is not inherently negative, as any variation between the intended execution price and the actual execution price is considered slippage. Market prices can change rapidly, leading to slippage during the time it takes for a trade order to be processed and completed. This phenomenon is more likely to occur during periods of high volatility, such as during significant news events or economic data releases. Under typical market conditions in forex, major currency pairs are less susceptible to slippage due to their higher liquidity. The major currency pairs include EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, and NZD/USD. To mitigate the risk of slippage, traders can use limit orders instead of market orders.

Types of Slippage

For instance, if you aim to buy EUR/USD at a price of 1.1050, you would see this price displayed on your trading platform and click “Buy.” This means you want your buy order executed at 1.1050. The order is then sent to the broker via your internet connection. Upon receiving the order, the broker must verify that you have sufficient funds to cover the new order, which involves checking your available margin after considering any other open positions. This process, from communication to data processing, introduces a delay. Consequently, the live price may have changed from the time the broker received the original quote to when the order is filled. The difference between the quoted price and the fill price is what constitutes slippage. The final execution price compared to the intended execution price can result in one of three scenarios: no slippage, positive slippage, or negative slippage.

No Slippage: The order is submitted, and the best available buy price is 1.1050 (exactly what you requested), resulting in the order being filled at 1.1050.

Positive Slippage: The order is submitted, and the best available buy price suddenly changes to 1.1045 (5 pips below your requested price), leading to the order being filled at this more favorable price of 1.1045.

Negative Slippage: The order is submitted, and the best available buy price suddenly changes to 1.1057 (7 pips above your requested price), resulting in the order being filled at this price of 1.1057.

What Causes Slippage?

Slippage occurs due to the dynamics of the market, which consists of buyers and sellers. For every buyer wanting to purchase at a specific price and quantity, there must be an equal number of sellers willing to sell at that same price and quantity. If this balance is disrupted, it leads to price fluctuations. For example, if you wish to buy EUR/USD at 1.1050 but there aren’t enough sellers at that price, your order will seek the next best available price, which will likely be higher, resulting in negative slippage. If your order is filled at 1.1053, you experience a negative slippage of 3 pips. Conversely, if there are many sellers willing to sell euros, your order might find a seller at a lower price, such as 1.1048, resulting in positive slippage.

Slippage can also occur with stop loss orders. Even if you have a stop loss order set in your trading platform, if the market moves too quickly, your order may not be filled at the intended price. For instance, if you bought EUR/USD at 1.1050 and set a stop loss at 1.1030, but the market suddenly drops due to unforeseen events, your stop loss might trigger at a much lower price, such as 1.0930, resulting in a negative slippage of 100 pips!

Why Does Slippage Matter?

Slippage is significant because it can lead to receiving unfavorable execution prices, allowing brokers to profit without risk. For example, if you want to trade GBP/USD and your broker quotes you 1.3085 (bid) and 1.3090 (ask), but due to delays, the market moves to 1.3080 when your market order is executed, the broker can fill your order at 1.3080. However, since you requested to buy at 1.3090, the broker buys GBP/USD at 1.3080 and sells it to you at 1.3090, making a riskless profit of 10 pips. As a trader, you may be unaware of the price change and only see your order executed at 1.3090.

Requotes

Instead of filling an order at a different price, some brokers may issue a requote. This occurs when a broker cannot or does not want to fill an order at the requested price, resulting in a delay and a new quote, often less favorable. If the market has moved beyond a certain threshold, the broker will provide a new price, known as a “requote.” You then have the option to trade at this new price, but there is no guarantee that the new order will be filled, and you may receive another requote. This often happens during fast-moving markets, such as during significant economic announcements or central bank press conferences. By the time the broker processes the order, the market may have shifted too quickly to execute at the displayed price. A requote notification will appear on your trading platform, indicating that the price has changed and allowing you to decide whether to accept the new price. Requotes typically occur with large trades, and if your broker cannot execute your order immediately, even a brief delay can result in significant price variations. While requotes can be frustrating, they reflect the reality of rapidly changing prices. However, if requotes happen frequently in stable markets, it may be time to consider switching brokers.