Understanding Slippage
Understanding Slippage: What it is and How to Minimize it
Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. It's a common phenomenon in all financial markets, including prediction markets, and it's particularly important to understand when using market orders.
Why Slippage Occurs:
Slippage happens because markets are dynamic. Prices are constantly changing based on supply and demand. When you place a market order, you're essentially saying, "Buy/sell these shares at the best available price right now." However, between the time you place the order and the time it's executed, the best available price might have changed.
Factors that Affect Slippage:
Market Liquidity: Low liquidity (few buyers and sellers) leads to higher slippage. If there aren't many orders on the order book, your order might need to "walk up" or "walk down" the book to be filled, resulting in a worse price.
Order Size: Large orders are more likely to experience slippage than small orders. A large order can exhaust the available liquidity at the current price, forcing the price to move.
Market Volatility: High volatility (rapid price changes) increases the likelihood of slippage. The price can move significantly in the short time it takes to execute your order.
Example of Slippage:
Let's say the current price of YES shares for a narrative is $0.50. You place a market order to buy 1000 YES shares.
Scenario 1 (Low Slippage): There's plenty of liquidity at $0.50. Your order is filled immediately at $0.50 per share. Total cost: $500.
Scenario 2 (High Slippage): There's limited liquidity at $0.50. Only 500 shares are available at that price. The next 300 shares are available at $0.51, and the final 200 shares are available at $0.52. Your order is filled, but your average price is higher than $0.50. Total cost will be higher.
How to Minimize Slippage:
While you can't eliminate slippage entirely, you can take steps to minimize its impact:
Trade on Liquid Narratives: Choose narratives with high trading volume and good liquidity. You can see the liquidity indicators on the Narrative Cards and Narrative Details pages.
Use Limit Orders: Limit orders give you precise control over the execution price. Your order will only be filled at your specified limit price or better. This eliminates the risk of unfavorable slippage, but it also means your order might not be filled at all.
Trade Smaller Amounts: Break up large orders into smaller chunks. This reduces the impact of any single order on the market price.
Avoid Trading During Periods of High Volatility: If you see that a market is experiencing rapid price swings, consider waiting for the volatility to subside before placing a large order.
Check the Order Book: Before placing a market order, look at the order book (on the Narrative Details page) to get a sense of the available liquidity at different price levels.
Be Patient: If you're not in a rush, consider using limit orders and waiting for the market to move to your desired price.
Slippage Tolerance (Advanced):
Some platforms (though not necessarily a default feature on Zeitgeist) allow you to set a "slippage tolerance." This is a percentage that specifies the maximum acceptable price difference between your expected price and the execution price. If the slippage exceeds your tolerance, the order will not be executed. This is a more advanced feature and should be used with caution.
By understanding slippage and taking these steps to minimize it, you can improve your trading outcomes on Zeitgeist.
Last updated