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.
Glossar
Expected Price
Price ⎊ Within cryptocurrency derivatives, options trading, and financial engineering, price represents the prevailing market valuation of an underlying asset, reflecting a complex interplay of supply, demand, and anticipated future performance.
Market Volatility
Dispersion ⎊ Market volatility within cryptocurrency, options, and derivatives contexts represents the magnitude of price fluctuations over a defined period, quantified typically by standard deviation or variance of logarithmic returns.
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.