What Is ‘Slippage’ in Trading and How Does It Affect Arbitrage Profitability?

Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. It typically occurs in volatile markets or when executing large orders with low liquidity.

Slippage directly reduces the profit margin of an arbitrage trade. If the slippage is greater than the initial price discrepancy, the arbitrage trade can result in a loss instead of a risk-free profit.

Arbitrageurs must factor in potential slippage.