In stock market jargon, the term slippage is used to describe the difference between the price which an investor wants to pay for a security, and the actual average price at which the securities broker completes the full trade. The term is widely used in day trading, particularly with regards to CFD and forex trading.

Example: A forex trader orders their broker to purchase the EUR/CHF currency pair at the rate of 1.1671 CHF. However, the broker is only able to fill the order at 1.1679 CHF instead of the desired 1.1671 CHF. In this case the slippage is 8 pips. The trader must pay more than they anticipated for the investment.

The risk of slippage is generally higher in volatile markets in which prices are subject to frequent, drastic changes. However, ongoing high slippage can also hint at incompetence on the part of the broker or even a deliberate attempt by a broker to profit at the expense of its customers.

Market orders bear a particularly high possibility of slippage because transactions are performed at the best available offer. In this case, the broker buys or sells securities at the best price they are offered (or claim to they have been offered). Limit orders provide one way to limit slippage by preventing trades from being performed at a price lower than that specified by the investor.

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Expert Benjamin Manz
Benjamin Manz is CEO of and an independent expert on banking and finance.