Slippage is a phenomenon in crypto trading, especially relevant to institutional trading, that can have a significant impact on the execution of large orders. It happens when the actual execution price of an order differs from the expected price. Slippage can be both positive and negative, resulting in either better or worse outcomes than initially anticipated. Today, we’ll discuss the reasons why slippage happens, how to calculate it, and what measures to take to avoid it.

Reasons for Slippage Crypto

Here are some factors that cause slippage:

  • Liquidity. In highly liquid markets, large orders can be executed with minimal price impact. However, in markets with low liquidity or when dealing with substantial order sizes, executing trades at the desired price can be challenging and cause slippage.
  • Order size. The size of an order relative to the overall market depth plays a crucial role. Larger orders are more likely to experience slippage, as they may exhaust available liquidity at the desired price level.
  • Volatility. Periods of high market volatility can exacerbate slippage. Rapid price movements can lead to significant deviations between the expected and real prices.

Impact on Crypto Institutional Trading

Slippage can result in higher transaction costs, as orders may be executed at less favorable prices. It can affect the overall performance of an investment portfolio.

Institutional investors should carefully manage slippage risk, especially when executing large orders. Risk management strategies may include breaking down large orders into smaller ones or applying advanced algorithms that help to minimize slippage.

Many institutional investors use algorithmic trading strategies and set limit orders to reduce crypto slippage. These algorithms are designed to execute orders efficiently while minimizing price impact.

How to Calculate Slippage?

To calculate crypto slippage, an investor should first carry out an analysis:

  1. Determine the expected execution price (the price at which the investor would like to conduct the order), or current market price (the investor agrees to work with).
  2. Understand the real price (the real price at which the deal was actually executed).
  3. Make calculations. Slippage is the difference between the expected price and the real rate. That is the expected price minus the actual price. Positive slippage means the result of the calculation turned out to be positive and the investor executed the trade in better conditions. A negative result, respectively, stands out for a worse price, which means negative slippage.
  4. To get the result in percentages, do the following calculations: (Slippage/expected price)* 100.

Key Takeaways

  • The crypto market is increasingly volatile, so when a trader plans to execute an order at the current price, one may receive a positive or negative slippage, for the price may move (both up and down).
  • The price movement may be affected by liquidity, volatility and order size.
  • In some cases, it is better to break a large amount of funds into smaller portions and trade them separately, to reduce slippage.
  • Algorithmic trading, risk management, and setting limit orders help to avoid negative slippage.

Institutional investors should learn to navigate the complex interplay between market dynamics and order execution to optimize their crypto trading outcomes.