I. What Is Slippage?

Slippage is the difference between a trade's expected price and the price at which it's executed. This occurrence is especially prevalent in high-volatility and low-liquidity markets, like the crypto market. Cryptocurrency markets are known for their rapid and significant price changes over short periods of time, which can result in unexpected slippage for traders.
 

II. What Are the Causes of Slippage in Cryptocurrency Market?

1. Insufficient or Lack of Liquidity on Trading Platforms
In cases where the exchange lacks of liquidity, market orders with large amount may not execute at the expected prices. For example, User A wants to purchase 10 BTC at a rate of 30,000 USDT, the order might be filled as follows:

  • 4 BTC sold at the price of 30,000 USDT
  • 3 BTC sold at the price of 30,001 USDT
  • 3 BTC sold at the price of 30,002 USDT

In this situation, the average filled price is 30,000.90 USDT, which surpasses the initial order price of 30,000 USDT, resulting in a 0.90 USDT slippage.

 
2. High Volatility in Cryptocurrency Market
In the highly volatile cryptocurrency market, slippage can occur due to market price changes after an order is placed. Let's assume that User A wants to purchase 10 BTC at the rate of 30,000 USDT. The order book shows the BTC bid and ask price of 29,990.50 USDT/30,000 USDT at the time of order placement. Due to market turbulence, the price can change rapidly within seconds, with large orders impacting the market and providing high-frequency traders an advantage.
Before the order executes, high-frequency trading may cause rapid price shifts, leading to a bid/ask of 30,000.50 USDT/30,001 USDT at the time of order execution. Consequently, the order is executed at 30,001 USDT. This results in an increased cost of 1 USDT per BTC. Therefore, the slippage for this order is 10 USDT.

3. Ways to Prevent Slippages
3.1 Using the Guaranteed Price feature
You can enable the "Guaranteed Stop Loss (SL) feature when setting your stop loss order. This ensures that your order is filled at the specified price, thereby avoiding slippage losses.

3.2 Prioritize limit orders Instead of market orders
In contrast to market orders that execute at the prevailing best price, limit orders are fixed at the preset price to ensure that your trades execute at your specified price. However, this does not always ensure the entire order is executed at the preset price, as partial execution might occur.

3.3 Be cautious while selecting a trading exchange
Slippage in cryptocurrency trades is a widespread issue affecting all traders, including institutions and individuals. AlphaX understands the importance of trading costs and thus continuously connects with leading liquidity providers to improve market liquidity and offer the best trade prices. Additionally, trading in more stable market periods can significantly reduce the chances of orders not filling or partially filling at the set price, thereby reducing slippage risks.

3.4 Splitting large orders into smaller orders
Large orders require more liquidity and tend to have longer execution times, making them susceptible to slippage. To mitigate this, consider dividing large orders into several smaller ones, spreading out the execution over time or even across trading exchanges to effectively manage slippage risk.
Additionally, algorithmic trading strategies like Time-Weighted Average Price (TWAP) or Volume Participation (VP) can help control the timing and pricing of trades, thereby preventing slippage.