Bid-Ask Spread and Slippage: The Trading Costs You Must Measure
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Executive Summary
- ✦The chart price may differ from the executable bid or ask.
- ✦Slippage grows when liquidity is thin, volatility is high or orders are large.
- ✦Market orders prioritise execution; limit orders prioritise price but may not fill.
- ✦Measure round-trip costs and actual fills before judging an edge.
The chart price is not always the price a trader can receive. Bid-ask spread and slippage are execution costs that can turn a promising paper result into a weak real result, particularly in fast or thin markets.
Learning objective
This lesson explains the spread, slippage and market impact, shows how to include them in a trade calculation and identifies conditions in which execution risk normally increases.
Bid, ask and spread
The bid is the highest displayed price a buyer is offering. The ask is the lowest displayed price a seller is offering. The difference is the spread.
A market buy normally executes against the ask; a market sell normally executes against the bid. If an instrument shows a bid of £19.96 and an ask of £20.04, the displayed spread is £0.08. Buying and immediately selling without a price change would lose roughly that spread before commission.
Quoted spread can change quickly, and the displayed size may be smaller than the desired order.
What slippage means
Slippage is the difference between the expected execution price and the actual average fill. It can be negative or positive, although risk planning should not rely on favourable slippage.
Common causes include:
- Price moving while the order travels and executes.
- Insufficient liquidity at the best displayed price.
- A large order consuming several levels of the order book.
- News, opening auctions, overnight gaps and stop-order cascades.
- Different latency and routing quality.
Worked example
Assume a hypothetical trader plans to buy 500 shares around £20.04. Only 150 shares are available at £20.04, 200 at £20.07 and the remaining 150 at £20.11.
The average fill is £20.073. Compared with the expected £20.04, entry slippage is £0.033 per share, or £16.50 across 500 shares. If the position later exits with another £20 of spread and slippage plus £8 commission, total execution cost is £44.50.
A strategy expecting £60 gross profit per trade would retain only £15.50 in this example. Ignoring execution would overstate the expected result by almost four times.
Market orders and limit orders
A market order prioritises execution but does not guarantee price. A limit order controls the worst acceptable price but may fill partially or not at all. A stop order becomes executable after its trigger and can fill beyond the stop price during a gap.
The choice is a trade-off between certainty of execution and certainty of price. Neither order type removes risk.
When costs often increase
- Market open and close.
- Major economic releases and company announcements.
- Overnight and weekend gaps.
- Small or rarely traded instruments.
- Sudden volatility and one-sided order flow.
- Orders large relative to available depth.
Measure actual fills by setup, instrument and time of day rather than using one cost assumption everywhere.
Common mistakes
- Backtesting at midpoint or closing prices that were not executable.
- Counting commission but ignoring spread and slippage.
- Assuming every limit order receives a full fill.
- Using normal-market costs for news events.
- Placing stops where a small amount of ordinary spread can trigger them.
- Scaling size without modelling market impact.
Pre-trade checklist
- What are the current bid, ask and displayed sizes?
- Is the order large relative to available liquidity?
- Which order type matches the priority: price or execution?
- What conservative slippage should be included?
- Are news, the open, the close or a weekend gap near?
- Does the trade still make sense after round-trip costs?
- Are actual fills being recorded for future estimates?
The Money Man lesson
Treat execution as part of the strategy. Estimate the round-trip spread, commission and adverse slippage before entry, then compare the total with the expected edge. If the edge disappears under realistic costs, the setup is not viable at that size or in that market condition.
Educational information only. The example is hypothetical. Prices and liquidity can change without warning, and no order type guarantees a fill or prevents losses.