What Is Slippage?

Slippage occurs when a trade settles for a different price than expected or requested. It is caused by the amount of liquidity, which is how quickly you can buy and sell an asset without impacting the price.

So if there is low liquidity or low trading activity in the market for a specific asset, then the slippage percentage is higher.

Example:

Suppose you want to place a market buy order at $1000, but the market doesn't have the liquidity to fill your order at that price. As a result, you will have to take the following orders (above $1000) until your order is filled entirely.

This will cause the average price of your purchase to be higher than $1000, 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.