What Is Slippage In Trading and How Does It Work?

What is slippage, and how does it work in relation to prediction markets? “Slippage” is the term that describes the difference between the expected price of an event contract and the actual trade execution price.
Slippage in prediction markets can be both negative and positive. Negative slippage is when the order closes at a higher price than your initial purchase price. Positive slippage is when the trade executes at a lower price than you expected to buy for. Order size, liquidity, and market volatility are the three main factors that cause slippage on event contracts.
Definition of slippage: An overview
In basic terms, slippage is the difference between the expected price of a trade and the execution price. Primarily, slippage happens in low liquidity or highly volatile markets, and can apply to all forms of trading, including prediction markets, crypto, stocks, and forex.
As we explained above, slippage can be both negative and positive:
Why positive slippage isn’t always a good thing
On the face of it, you might think that
slippage = bad
positive slippage = good, but that’s not always the case. While positive slippage does mean a lower outlay and therefore high potential profits if your prediction turns out to be correct, you have to think of the reasons why positive slippage has occurred.
If the price of an event’s contract has gone down, so has the chance probability of the prediction from happening. For example, if Nikola Jokić and Jamal Murray were to get injured at the same time, the price of a Nuggets win would slip positively.
Your overall outlay on “Yes” contracts for a Nuggets win would be much lower, but you’d have a higher chance of losing that money.
What causes
slippage in trading?
Here’s a more detailed explanation of things that can cause slippage in trading and prediction markets:
Low liquidity
– The prediction market has a low trading volume, meaning that large trades could massively impact the price both positively and negatively.
Market volatility –
Event contracts for prediction markets that are subject to massive price hikes and falls before the event is executed. Cryptocurrency price-related markets are the most obvious example.
Rapid market changes
– An unexpected event that instantly impacts the event contract prices of an otherwise relatively stable market. For example, an actor getting cancelled could cause them to drop from being the favorite to win an Oscar to a rank outside or outright impossibility.
How does slippage work in prediction markets?
Specifically looking at prediction market apps, slippage is the difference between the expected and executed price for your event contracts. For example, you buy “Yes” contracts for the Chiefs to beat the Broncos on the spread at $0.60, but low liquidity results in the order filling at $0.65.
What is crypto slippage?
If looking at actual crypto trading, a slip would occur if the price moves up or down from your initial order price. For example, you ordered BTC at $1,000, but it closed at a $1,020 order price.
For crypto prediction markets, it works much the same as described in the section above. To use a positive slippage example, let’s look at the market “BTC Price by 3 pm Today EDT?”.
You buy shares for “$76,500 or higher” at $0.48, but as it’s a fast-moving and volatile market, the executed price drops to $0.45.
What is slippage tolerance?
Slippage tolerance is a preset maximum price difference that you will accept when initially buying a trade. It is used to protect your event contracts from a heavy negative slippage that results in a trade that’s too financially unfavorable to you.
As explained in our guides to prediction markets, all legitimate CTFC-regulated exchanges have a tool in place that you can utilize when buying your event contracts. Let’s look at an example.
The limit orders function at Kalshi
On Kalshi, one of the biggest prediction market sites in the US, there’s a “Limit Orders” option that you can use for slippage tolerance. This allows you to set the minimum and maximum prices that you will accept, and the time by which you’ll accept them.
You also have a “Resting order” option, which means that the trade will sit in the book, and your event contract purchase will only go through if the price is met. Here’s a step-by-step guide showing how it works:
Select the events contract that you wish to purchase (e.g., “Yes” for Orlando to beat Detroit in the NBA)
Confirm the “Buy” option (not “Sell”)
Click the arrow on the side of the purchase slip
Scroll down and select “Limit order.”
Enter the number of contracts that you wish to purchase
In the “Limit Price “field, enter the maximum price that you’re willing to pay per contract
Choose your “Expiration Time” option
Mark the “Submit as resting order only” checkbox (optional)
Hit “Submit” to finish
The trade will now only go through if the price doesn’t slip above the maximum limit price within your chosen time frame
Your slippage tolerance expiration time frames
Below are the expiration time-frame options you can choose on Kalshi, which we used as an example above. However, most other prediction market sites offer similar options on their slippage tolerance tools.
Good ‘til cancelled (GTC)
– The trade stands until the price limit is exceeded, in which case it will be cancelled automatically.
Immediate or cancel (IOC)
– The trade is immediately canceled if your price isn’t met straight away.
– Most prediction market sites work on United States Eastern Standard Time, and give you a same-day midnight auto cancellation option for slippage tolerance.
Specific date and time
– You can use a calendar tool to select your own date and time. Of course, this must be before the event that you’re predicting takes place.
Our top tips to mitigate events contracts slippage
Here are our top five expert tips to help protect yourself against slippage:
The pros and cons of prediction markets’ slippage
Before we finish, here are the pros and cons of slippage:
Prediction markets and
trading slippage
– Conclusion
In summary, slippage is the difference between the expected price and the final executed price of an event contract for a prediction market. Negative slippage is when the price is higher than expected, and positive slippage is when it ends up lower.
You can mitigate slippage by placing limited orders on your prediction market site. This allows you to set a maximum price-per-contract that you’ll accept for the market.
Our recommended prediction market sites this June
What is slippage?