What Is Slippage in Futures Trading

Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It can occur in any market but is most common during periods of high volatility or when large orders are executed in futures markets with insufficient volume to maintain the current bid/ask spread.

Table of Contents:

Key Takeaways

Slippage happens when the trade execution price differs from the intended price.
It occurs when the bid/ask spread changes between the time a market order is placed and when it is executed by the exchange or market maker.
Slippage can occur in equities, bonds, currencies, futures, and even cryptocurrency markets.
Execution price outcomes can be categorized as positive slippage (better than expected), negative slippage (worse than expected), or no slippage.
Investors can limit slippage by avoiding trading during high-volatility periods, trading in highly liquid markets, and placing limit orders instead of market orders.

How Does Slippage Work?

Slippage occurs when market prices change quickly, leading to a difference between the intended execution price and the actual execution price. This happens because market orders are executed at the most favorable price available at the time of execution, which can differ from the requested price due to bid/ask spread fluctuations.

Slippage can be positive, meaning the investor gets a better price than expected, or negative, meaning the investor gets a worse price. While limit orders can prevent negative slippage by specifying a price ceiling or floor, they carry the risk of not being executed if the market does not reach the limit price.

Slippage in the Futures Market

Slippage is common in the futures market, particularly during high-volatility periods such as economic news releases or after-market hours when liquidity is lower. For instance, a stop-loss order in the futures market may execute at a price different from the intended level due to rapid price movements in the underlying contract. To manage slippage risk, some traders use options on futures contracts to limit their downside exposure or hedge against adverse price movements.

How to Reduce the Impact of Slippage

Investors can take several steps to limit the impact of slippage:

Trade During Calm Market Periods: Avoid trading during major economic announcements or when markets are extremely volatile.
Place Limit Orders: Unlike market orders, limit orders allow investors to specify the maximum price they are willing to pay or the minimum price they are willing to accept. While this avoids negative slippage, there is a risk the trade may not be executed.
Use Platforms With Slippage Tolerance Settings: Some trading platforms allow investors to set a maximum slippage percentage, ensuring that orders are only executed within an acceptable price range.

The Bottom Line

Slippage is a normal part of trading and occurs when the executed price of a trade differs from the intended price. It is more common in volatile or illiquid markets, but it can also work in favor of the investor through positive slippage. To reduce its impact, investors should trade in calm markets, use limit orders, and take advantage of tools that manage slippage risks.