Slippage

#Definition

Slippage is the difference between the price you expect to pay (or receive) for a trade and the price at which the trade actually executes. It occurs when there isn't enough liquidity at your target price to fill your entire order, forcing execution at progressively worse prices.

In prediction markets, slippage is a hidden cost that can turn profitable trades into losing ones. A market showing Yes at $0.50 might actually cost$0.55 or more for a large order, significantly changing the trade's expected value.

#Why It Matters in Prediction Markets

Slippage directly affects profitability and should be factored into every trading decision.

Erodes edge: A strategy with 5% expected edge becomes unprofitable if slippage costs exceed 5%. Many traders discover their "winning" strategies lose money after accounting for execution costs.

Varies by market: Major political markets on Polymarket might have 0.5% slippage for $10,000 orders. A niche market might have 10$500 order. This variation determines which opportunities are actually tradeable.

Affects position sizing: Slippage increases with order size. A trade that's profitable at $1,000 might be unprofitable at$10,000 due to the larger price impact.

Creates urgency tradeoffs: Executing slowly reduces slippage but exposes you to price movements from other traders or new information.

#How It Works

#Mechanics of Slippage

Slippage occurs because order books have limited depth at each price level. A large order "eats through" the available shares at the best price and moves to the next (worse) price.

Visualizing Order Depth:

Execution Breakdown:

Result:

• Expected Cost: $500 ($0.50 avg)
• Actual Cost: $506 ($0.506 avg)
• Slippage: 1.2%

#Slippage Calculation

Slippage = (Actual Average Price - Expected Price) / Expected Price

In this example:
Slippage = ($0.506 - $0.50) / $0.50 = 1.2%

#Slippage in AMM Markets

AMM-based markets calculate slippage mathematically based on trade size relative to pool size:

For a constant product AMM (x × y = k):
Price Impact ≈ Trade Size / (2 × Pool Liquidity)

Example: $1,000 trade in a $50,000 pool
Slippage ≈ $1,000 / (2 × $50,000) = 1%

Larger trades or smaller pools create exponentially more slippage.

#Numerical Example: Size Sensitivity

Same market, different order sizes:

The relationship is non-linear; doubling order size more than doubles slippage.

#Slippage Curve

#Developer Guide: Calculating Slippage

If you are building a trading bot, you can estimate slippage by simulating the order execution against the order book snapshot.

/**
 * Calculates expected average price and slippage for a market order.
 * @param {Array} orderBook - Array of {price, size} objects, sorted by best price.
 * @param {number} orderSize - Total shares to buy/sell.
 * @returns {object} - { averagePrice, slippagePercent }
 */
function calculateSlippage(orderBook, orderSize) {
  let remaining = orderSize;
  let totalCost = 0;
  const bestPrice = orderBook[0].price;

  for (const level of orderBook) {
    const fillAmount = Math.min(remaining, level.size);
    totalCost += fillAmount * level.price;
    remaining -= fillAmount;

    if (remaining <= 0) break;
  }

  if (remaining > 0) {
    throw new Error("Insufficient liquidity to fill order");
  }

  const averagePrice = totalCost / orderSize;
  const slippagePercent = ((averagePrice - bestPrice) / bestPrice) * 100;

  return {
    averagePrice: parseFloat(averagePrice.toFixed(4)),
    slippagePercent: parseFloat(slippagePercent.toFixed(2)) + "%"
  };
}

#Examples

#Example 1: Breaking News Trade

News breaks suggesting a candidate will drop out. The "Will Candidate A win nomination?" market currently shows Yes at $0.60.

You place a market order to sell 5,000 Yes shares immediately. The order book has:

• 2,000 shares bid at $0.59
• 3,000 shares bid at $0.55
• 5,000 shares bid at $0.50

Your 5,000 shares execute: 2,000 @ $0.59 + 3,000 @$0.55 = $2,830

Average price: $0.566 instead of$0.60 Slippage: $170 (5.7%)

Still worth it if the price will drop to $0.30, but the slippage significantly reduced your profit.

#Example 2: Illiquid Niche Market

A market on "Will obscure bill pass committee vote?" shows Yes at $0.35 with only 200 shares at that price.

You want 1,000 shares. After consuming thin liquidity:

• 200 @ $0.35
• 300 @ $0.42
• 500 @ $0.55

Average price: $0.467 Slippage: 33%

At $0.467, you need the event to occur 47% of the time just to break even, far above the originally displayed 35%.

#Example 3: Patience Pays

Instead of market ordering 1,000 shares, you place a limit order at $0.51 for the full amount. Over three hours:

• 300 shares fill at $0.51
• 200 shares fill at $0.50 (price improved)
• 500 shares fill at $0.51

Average price: $0.506 Slippage: 1.2% vs. potential 3%+ with market order

Patience reduced slippage by half, though exposed you to the risk of prices moving away.

#Example 4: Positive Slippage (Price Improvement)

Rarely, slippage works in your favor.

Scenario:

1. You place a Limit Order to buy at $0.55.
2. While your order is processing, a large seller dumps shares, pushing the price down to $0.52.
3. Your order fills at **$0.52** instead of your limit of$0.55.

Result: You saved $0.03 per share. This is called "Price Improvement" and is a benefit of using limit orders in volatile markets.

#Risks and Common Mistakes

Using market orders in thin markets

Market orders guarantee execution but not price. In a low-liquidity market, a market order might fill at catastrophic prices. Always check depth before using market orders.

Ignoring slippage in expected value calculations

Traders often calculate EV using displayed prices, then execute at worse prices. A trade with +5% theoretical EV might have -2% actual EV after slippage.

Chasing fast markets

When prices are moving rapidly, slippage typically increases as market makers widen spreads and depth thins. Urgency to trade often coincides with worst execution conditions.

Fat finger errors

Entering an order for 10,000 shares instead of 1,000 can cause massive slippage in thin markets. Always verify order size, especially on mobile interfaces.

Underestimating exit slippage

Traders focus on entry slippage but forget they'll face slippage again when exiting. Total round-trip slippage can exceed 10% in illiquid markets.

#Slippage Prevention Checklist

Before placing a large order, run through this quick check:

• Check Market Depth: Is there enough volume at the top price levels to absorb my order?
• Review Spread: Is the gap between bid and ask reasonable (<2%)?
• Use Limit Orders: Default to limit orders to cap your maximum price.
• Split Orders: Can I break this 5,000 share order into five 1,000 share orders?
• Check Platform Estimate: Does the UI warn about high price impact?

#Practical Tips for Traders

• Check price impact before submitting: Most platforms display expected slippage. If it exceeds 2-3%, consider limit orders or splitting your order

• Size positions for acceptable slippage: If 1% slippage is acceptable and $1,000 causes 1$1,000

• Use limit orders as default: Set your maximum acceptable price rather than accepting whatever the market offers

• Split large orders over time: Execute in smaller pieces, allowing depth to replenish between trades

• Trade during high-activity periods: Slippage is typically lowest when most traders are active and market makers are providing depth

• Set slippage tolerance limits: Most platforms allow you to set maximum acceptable slippage; the order fails if exceeded

• Factor slippage into edge requirements: Only trade when your expected edge exceeds expected slippage by a comfortable margin

#Related Terms

• Liquidity
• Market Depth
• Order Book
• Market Order
• Limit Order
• Spread
• AMM (Automated Market Maker)

#FAQ

#Is slippage the same as the spread?

No. The spread is the gap between best bid and best ask, the cost of immediately crossing from one side to the other. Slippage is the additional cost when your order is too large to fill at the best price and must consume deeper levels of the order book. You always pay the spread; you pay slippage only when trading size relative to depth.

#Can slippage be positive?

Yes, though it's rare. Positive slippage (price improvement) occurs when your order fills at a better price than expected, typically when a counterparty's order arrives between your order placement and execution. It's more common with limit orders than market orders.

#How do I calculate slippage on Polymarket?

Polymarket displays expected price impact before you confirm trades. The interface shows your expected average price and the percentage difference from the current displayed price. Always review this before confirming, especially for larger orders.

#Why does slippage increase with order size?

Order books have limited shares available at each price level. Once you consume available shares at the best price, your order continues filling at progressively worse prices. Larger orders must reach deeper into the book, encountering worse prices along the way.

#Should I always avoid slippage?

Not necessarily. Sometimes paying slippage is rational; for example, when you have time-sensitive information and the cost of waiting exceeds the slippage cost. The goal is making slippage a conscious, calculated cost rather than an overlooked expense that erodes profitability.