How Do Exchanges Attempt to Mitigate Slippage for Large Market Orders?
Exchanges use several methods to mitigate slippage. They encourage market makers through incentives to maintain deep order books, which absorbs large orders more effectively.
They also implement smart order routing systems that seek the best prices across multiple liquidity pools. Some exchanges may offer 'guaranteed execution' for small orders, but for large orders, the primary mitigation is ensuring deep liquidity.
Glossar
Central Limit Order Book
Aggregation ⎊ This mechanism collects all outstanding buy and sell orders into a single transparent ledger.
Smart Order Routing
Execution ⎊ Smart Order Routing (SOR) within cryptocurrency, options, and derivatives markets represents a sophisticated algorithmic approach to order fulfillment, prioritizing optimal price and speed of execution across multiple liquidity venues.
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.
Large Orders
Execution Venue Selection ⎊ Large Orders present a challenge in achieving minimal market impact, requiring traders to slice the order across multiple venues or utilize dark pools to source liquidity without revealing full intent prematurely.