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TL;DR

The difference between the expected execution price and the actual execution price. Caused by market movement during order execution, order book depth limitations, and latency.

By Valenke Exam Prep Team·Last updated 2026-06-03

Slippage

The difference between the expected execution price and the actual execution price. Caused by market movement during order execution, order book depth limitations, and latency.

Why it matters for interviews

Slippage directly erodes strategy returns. Accurate slippage estimation is critical for backtesting realism. Many strategies that appear profitable in frictionless backtests fail after accounting for slippage.

Definition and Mathematical Foundation

The difference between the expected execution price and the actual execution price. Caused by market movement during order execution, order book depth limitations, and latency.

Application in Quantitative Finance

Slippage directly erodes strategy returns. Accurate slippage estimation is critical for backtesting realism. Many strategies that appear profitable in frictionless backtests fail after accounting for slippage.

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Frequently Asked Questions

How is slippage modeled in backtesting?▼
Simple models use a fixed basis point cost. Better models use square-root market impact: \( \text{impact} \propto \sigma \sqrt{V_{trade}/V_{daily}} \). The most realistic approach uses historical order book data.
What is the square-root law of market impact?▼
Empirically, permanent market impact scales as \( \sigma \sqrt{Q/V} \) where Q is order size, V is daily volume, and \( \sigma \) is volatility. This robust finding holds across markets and time periods.
How do execution algorithms minimize slippage?▼
TWAP (time-weighted average price) spreads orders evenly. VWAP tracks volume patterns. Implementation shortfall algorithms optimize the speed-impact tradeoff dynamically based on real-time conditions.