Measuring Slippage: A Method

Trading fees are published. Slippage is not, and for any order of size it is usually larger.

The definition

The difference between the price you expected and the price you received.

For a market order, the expected price is the mid price at the moment of submission. For a swap, it is the quoted output.

The method

Step one. Record the mid price immediately before submitting. Mid is the midpoint between best bid and best offer, which most interfaces display.

Step two. Execute.

Step three. Compute the effective price: total paid divided by total received, including any fee charged separately.

Step four. Slippage is the difference between effective price and the mid price you recorded, expressed as a percentage.

What to expect

On a deeply traded pair, a small order should slip by a fraction of the spread. If it slips substantially more, the depth is not what it appeared.

On a thin pair, or a large order, slippage can exceed the trading fee by an order of magnitude.

Doing it systematically

Record the figure for every trade in the same spreadsheet as your fees. After twenty trades you have a distribution rather than an impression.

The distribution is what matters. A venue with a low average and a long tail is one where your worst executions are very bad, and worst executions cluster during volatility, which is when you are most likely to be trading.

Reducing it

Use limit orders. A limit order cannot slip beyond the limit. The cost is that it may not fill.

Split large orders. Several smaller orders over time generally receive better aggregate prices than one large one, at the cost of additional fees.

Trade during liquid hours. Depth is lowest at weekends and during off-hours in the main trading regions, and slippage scales inversely with depth.

Check depth before sizing. Most venues publish order book depth. Comparing your intended order against depth within one percent of mid tells you the impact before you trade rather than after.

Depth figures published by venues that quote the network fee separately and similar platforms make that calculation possible in advance.

The on-chain version

On a decentralised exchange, slippage tolerance is a setting rather than an outcome. It specifies the worst price you will accept before the transaction reverts.

A tight tolerance causes failed transactions, which cost gas. A wide one invites a considerably worse fill and enables sandwiching.

The correct setting depends on pool depth relative to your order. For a small trade in a deep pool, tight is fine. For anything else, the question is whether the trade should happen on-chain at all.

The conclusion from our own data

Across a year of recorded trades, slippage exceeded trading fees in the majority of executions above a modest size.

Anyone comparing venues on advertised fee alone is comparing the smaller number.