Definition
Slippage
Slippage is the difference between the expected price of a trade and the price at which it is actually executed, arising from market movement, spread and limited liquidity between order placement and fill.
On Indian exchanges, slippage is most visible in fast-moving or illiquid names where a market order fills several ticks away from the last seen price. It is a core implicit cost that execution algorithms and quant backtesting must model, since ignoring it produces unrealistically optimistic results.
Quant strategies estimate slippage using historical spreads, order-book depth and volatility, then build it into expected returns. A strategy that looks profitable on paper can turn negative once realistic slippage and market impact are deducted, which is why robust slippage modelling separates serious backtests from naive ones.
Related terms
- Implementation ShortfallImplementation shortfall is the difference between the price of a stock when the decision to trade was made (the arrival or decision price) and the actual average price achieved, including all explicit and implicit costs.
- Market ImpactMarket impact is the adverse price movement caused by the act of trading itself, where a large buy pushes the price up and a large sell pushes it down as the order consumes available liquidity.
- Slippage ModellingSlippage modelling is the quantitative estimation of expected execution costs, including spread, market impact and timing effects, so that a backtest or live strategy reflects realistic, achievable prices.
- BacktestingBacktesting is the process of simulating a trading strategy on historical data to estimate how it would have performed, including returns, drawdowns and risk, before committing real capital.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.