Why slippage matters
Slippage converts gross investment ideas into net returns and can erase strategies with small expected edges. Measuring it reveals capacity constraints and whether implementation is improving.
How it is applied
Managers timestamp decisions, choose a benchmark, capture every fill, and attribute cost to delay, spread, impact, and opportunity cost.
Portfolio example
A manager decides to buy at $40, but fills at an average $40.60. Purchase slippage is $0.60 per share before commissions.
How to interpret it
Negative slippage is a cost; favorable movement can produce positive slippage. Results should be compared across similar urgency, liquidity, and size.
Limitations and common misconceptions
Benchmarks can be gamed and market moves unrelated to the order are hard to separate. Unfilled orders create opportunity cost that fill-only reports omit.
Sources and further reading
- Trade Strategy and ExecutionCFA Institute
- Trade ExecutionU.S. Securities and Exchange Commission, Investor.gov