What Is ‘Slippage’ and How Does It Relate to the Size of a Hedge Execution?

Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. It occurs when the order is large enough to exhaust the liquidity at the best available price levels in the order book.

Larger hedge executions in illiquid markets lead to greater slippage, as the trade must be filled at progressively worse prices further down the order book.