This guide explains where slippage comes from, how to calculate it, worked examples for stocks and options, how market and limit orders differ, and how to reduce slippage and include it in testing.
Where slippage comes from
- The bid-ask spread. Buying at the ask and selling at the bid costs the spread on every round trip.
- Market impact. A large order uses up the best prices in the order book and fills at progressively worse ones.
- Delay. Prices move between the moment you decide and the moment the order reaches the exchange.
- Fast markets and gaps. Stop-loss orders often trigger when prices are moving quickly, and fill well beyond the stop.
How to calculate slippage
Slippage per unit = actual fill price − expected price (for a buy; the reverse for a sell)
Slippage in rupees = slippage per unit × quantity
Many traders also express it in basis points: slippage ÷ expected price × 10,000.
Worked examples
These examples are hypothetical.
A stock order
You plan to buy 300 shares at ₹250.00. The order book offers 100 shares at ₹250.20, 120 at ₹250.40 and 200 at ₹250.45. A market order fills at an average of:
(100 × 250.20 + 120 × 250.40 + 80 × 250.45) ÷ 300 = ₹250.35
Slippage is about ₹0.35 per share, or ₹104 on the order, about 14 basis points.
An options round trip
A Nifty option shows a bid of ₹98 and an ask of ₹100, with the last trade at ₹99. Buying at the ask and later selling at the bid, with no change in the option's value, costs ₹2 per unit, or ₹130 per lot of 65, before any charges.
A stop loss in a fast market
You hold Nifty futures with a stop at 25,010. A sharp fall triggers the stop and the order fills at 24,990. The extra 20 points cost 20 × 65 = ₹1,300 per lot beyond the planned loss.
Market orders vs limit orders
| Market order | Limit order | |
|---|---|---|
| Execution | Immediate, at the best available prices | Only at your price or better |
| Slippage | Can be large in fast or thin markets | None beyond your limit |
| Risk | Poor fills | No fill, or a partial fill, if the price moves away |
Limit orders control slippage but risk missing the trade. Many traders use limit orders for entries and accept market orders for stop-loss exits, where getting out matters more than the price.
Slippage in options
Options are especially exposed:
- Far out-of-the-money strikes often have wide spreads relative to their price.
- Monthly contracts and less liquid indices can have wider spreads than Nifty weeklies.
- Multi-leg strategies pay the spread on every leg, on entry and exit.
- Expiry day can bring sudden widening as prices jump.
How to reduce slippage
- Trade liquid instruments and strikes near the money.
- Avoid the first and last minutes of the session if your strategy allows, when spreads can be wide.
- Use limit orders for entries where possible.
- Split large orders. Orders above the exchange's freeze quantity must be split anyway; smaller orders also reduce market impact.
- Place all legs together for multi-leg strategies, so the market cannot move between legs.
- Automate execution to cut the delay between signal and order.
Including slippage in backtests
A backtest that fills every order at the last traded price overstates results. Better approaches:
- Fill at the next available price after a signal, not at the signal price.
- Buy at the ask and sell at the bid, where that data is available.
- Add a fixed slippage allowance per order, such as a number of points or basis points, based on your live fills.
- Add extra slippage for stop losses, which often fill worse than other orders.
Our guide on how to backtest trading strategies covers fill modelling in detail, and the brokerage calculator and STT tax calculator estimate the other costs.
Tracking slippage in live trading
Record the expected price and the actual fill for every order. Over time, the average slippage by instrument, order type and time of day tells you how to set your backtest assumptions and where execution can improve. A trade journal makes this routine. QuantPower's order book shows the time and price of every order, which you can compare with your strategy's intended prices.
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Frequently asked questions
What is slippage in trading?
The difference between the expected price of a trade and the price at which it is actually filled.
Is slippage always negative?
No. Occasionally a fill is better than expected, called positive slippage. On average, though, market orders and stops tend to fill worse than expected.
How much slippage should I assume in a backtest?
Base it on your own live fills where possible. Without them, assume at least the typical bid-ask spread on each round trip, plus more for stop losses.
Do limit orders have slippage?
Not beyond the limit price, but they can miss the trade or fill only partly.
Sources
- Kissell, R. (2013). The Science of Algorithmic Trading and Portfolio Management. Academic Press
- NSE: Impact cost, nseindia.com