Bid-Ask Spread and Slippage Explained — Kolin Lukas “B.A.”

Slippage is a common occurrence in markets with high volatility or low liquidity. Slippage occurs when a trade settles for a different price than expected or requested.For example, suppose you want to place a large market buy order at $100, but the market doesn’t have the necessary liquidity to fill your order at that price. As a result, you will have to take the following orders (above $100) until your order is filled entirely. This will cause the average price of your purchase to be higher than $100, and that’s what we call slippage.In other words, when you create a market order, an exchange matches your purchase or sale automatically to limit orders on the order book. The order book will match you with the best price, but you will start going further up the order chain if there’s an insufficient volume for your desired price. This process results in the market filling your order at unexpected, different prices.In crypto, slippage is a common occurrence in automated market makers and decentralized exchanges. Slippage can be over 10% of the expected price for volatile or low-liquidity altcoins.Slippage doesn’t necessarily mean that you’ll end up with a worse price than expected. Positive slippage can occur if the price decreases while you make your buy order or increases if you make a sell order. Although uncommon, positive slippage may occur in some highly volatile markets.Some exchanges allow you to set a slippage tolerance level manually to limit any slippage you might experience. You’ll see this option in automated market makers like PancakeSwap on Binance Smart Chain and Ethereum’s Uniswap.The amount of slippage you set can have a knock-on effect on the time it takes your order to clear. If you set the slippage low, your order may take a long time to fill…