What is Slippage?

By mosesbet · Filed Under Spread Betting Comments Off on What is Slippage? 

When you place a stop or limit order at a spread betting firm there might be a small different in the price between where the limit order was placed and when the actual order was filled.

Slippage is the difference between where a stop-loss is placed and where the actual order is filled.

Slippage normally occurs because of volatile market movements.  For example, volatile markets such as the FTSE 100 can drop 100 points per day.  This is why trading on the FTSE is not recommended for beginners.  If the market is trading at 5087-5088 then it could end up closing at 5000 at the end of the day (if you bet £1 per point than that’s a loss of £88).

When you place a stop-loss, it is not normally guaranteed.  Neither Capital Spreads, City Index, IG Index nor Tradefair offers guaranteed stop-losses unless you specify on your trade.  What can happen is that because the market is experiencing turmoil movements, when the price of the market triggers you stop-loss it might not be processed until the price has dropped even further.  The difference between when the order was triggered and when the order has been processed is called slippage.  Although it only takes a split second to process your order at most firms, the price change in this space of time can be massive.

Example of Slippage

Let’s say that your trading on the FTSE 100 at £5 per point at a quoted price of 5087-5088.  You then implement a stop-loss of 20 points below your position at 5067 to minimise any losses from incurring.  Towards the end of the day the FTSE 100 starts to fall quickly as panic selling begins amidst fears of a UK credit rating drop and a devaluation of the £.  The FTSE 100 falls to 5040 at the end of the day and your although your stop-loss was triggered at 5067 it wasn’t processed until the price dropped to 5065.  In this case you have suffered slippage of 2 points.

How to Avoid Slippage

Most beginners to spread betting limit the risks of slippage by executing a guaranteed stop-loss.  A guaranteed stop loss is a bit like an insurance policy: it guarantees that you trade will be exited at the stop-loss price (NO Slippage).

This sounds good right?  Well, the downside the guaranteed stop-losses are that you have to pay a premium in the form of a wider spread when you open the order.  For example, rather than a 1 point spread (5087-5088) on the FTSE 100 you might have to pay a 3 point spread (5087-5090).

The bigger spread charged by the platform reduces your potential profits will also give you bigger loss if the price stays the same (since you’re paying a 3 point loss rather than 1 point loss on the spread).  The added costs of guaranteed stop-losses are why professional traders don’t use them.

With regards to avoiding slippage, some spread betting firms are less prone to slippage and re-quotes than others.  It all comes down to how quickly your orders are processed and executed in addition to how busy the market is.  I’ve heard from many colleagues that City Index is one of the worst platforms for slippage problems, while ProSpreads’ DMA (Direct Market Access) platform allows you to trade the prices directly on the underlying markets themselves.  This leaves less room for re-quotes or price changes, plus it also lets you trade within the spreads themselves.

Should you use guaranteed stop-losses in spread betting?

If you’re a beginner or trading on the more volatile markets such as the S&P 500 than guaranteed stop losses are highly recommended.  They can counter-act the risks of trading on unpredictable markets with 100 point daily price movements.

On the other hand, most professional traders will not use guaranteed stop losses and will just accept that they will face a little bit of slippage (1-2 points) on 5% of their trades.  This small risk will be less costly then having to pay a large insurance premium across all of their trades.

 

Be Sociable, Share!