Definition
Slippage is the difference between the price you expected for a trade and the price at which it actually executes. It arises from price movement and limited depth between the decision and the fill, and it can be adverse or, occasionally, favorable.
How it works
Slippage tends to be larger for market and stop orders, for large orders relative to available depth, and during news, opens and fast markets. It is usually measured against a reference price such as the quote when the order was sent, the midpoint, or the previous close.
Because the same strategy traded in a thinner market suffers more slippage, it should be estimated per instrument and order size, not assumed to be a constant. Backtests and performance records that ignore slippage can overstate results, particularly for frequent or large trades.
Formula / convention
Slippage per unit = actual fill price − expected price for a buy, or expected price − actual fill price for a sell; slippage cost = slippage per unit × quantity
Illustrative example
Illustrative: a fictional share is quoted at HK$20.00 when you send a market order for 1,000 shares, and it fills 400 shares at HK$20.00 and 600 at HK$20.05. The cost is 8,000 + 12,030 = HK$20,030 instead of the expected 20,000, so adverse slippage is HK$30, or 0.15% of the expected cost. If 10 similar trades each slip by the same amount, the total is about 10 × 30 = HK$300.
What to watch for
Slippage is hard to predict and can be much larger than average in fast, gapping or thinly traded markets. Treat any backtest or estimate that assumes a fixed slippage as an approximation, because real conditions vary.