How Is the Depth of an Order Book Related to the Potential for Slippage?

The depth of an order book refers to the quantity of buy and sell orders at various price levels. A 'deep' order book has a large number of orders, especially near the current market price.

This depth allows large trades to be executed with minimal price impact, thus reducing slippage. Conversely, a 'thin' order book has few orders.

A large trade in a thin market will quickly exhaust the available liquidity at the best prices, causing the trade to 'slip' to progressively worse prices to be filled, resulting in significant slippage.