Slippage in Thin Markets: Causes and How to Reduce It
What slippage is
Slippage is the difference between the price you expect when you submit a trade and the actual execution price you receive.
In prediction markets and other order book markets, slippage is most common in thin markets where liquidity and depth are limited.
Why thin markets create slippage
Thin markets have low liquidity and limited market depth. That leads to a few predictable effects:
• You consume the best bid or ask quickly and must fill at worse prices.
• You get partial fills and the remainder fills later at different prices.
• Quotes change while your order is in flight, especially during news or near expiration.
Slippage vs spread
It is useful to separate three costs:
• Bid ask spread: what the order book shows at the top.
• Effective spread: what you actually paid relative to the midquote.
• Slippage: the additional loss from depth, speed, and market movement.
In a deep market, effective spread is often close to the quoted spread. In a thin market, effective spread can be much larger because slippage is embedded in your fills.
Common causes of slippage
1) Not enough depth at the top of book
If only a small quantity is available at the best price, larger orders will fill across levels. Your VWAP gets worse and slippage rises.
2) Market orders in unstable books
Market orders remove liquidity immediately. In thin books, they can be expensive because they accept whatever prices are available.
3) Partial fills and delayed completion
When you do not fill instantly, the remaining quantity faces a changing order book. This increases variance of execution price.
4) Spread widening regimes
During uncertainty or near expiration, spreads can widen and depth can disappear. This increases both spread and slippage at the same time.
5) Your own price impact
If your order size is large relative to depth, you can move the market yourself. That is price impact, and it behaves like slippage.
How to reduce slippage
Use sizing relative to depth
The simplest rule is: do not trade more size than the book can absorb near the top without moving price too far. If you see low depth, reduce size or accept that costs will be higher.
Prefer limit orders when possible
Limit orders let you control worst-case price. They can reduce slippage, but they increase the risk of not getting filled.
If you need certainty of execution, limit orders must be chosen carefully. A limit order that crosses the spread behaves like a market order.
Break size into smaller orders
Splitting a large order into smaller orders can reduce impact and improve VWAP. It can also increase time exposure and fill uncertainty, so log results and compare.
Avoid the worst times
Thin markets often get thinner near expiration, around major news, or outside peak hours. If timing is flexible, avoid periods where spreads are widening and depth is collapsing.
Measure, do not guess
Track slippage through realized execution metrics:
• Use VWAP from fills as your true execution price.
• Capture a clean midquote snapshot at trade time.
• Compute effective spread and compare it to quoted spread.
When effective spread is consistently larger than quoted spread, slippage is a real problem.
Worked example
• bid = 48c, ask = 52c, midquote = 50c
• you buy size and your VWAP ends up 52.7c
• effective spread = 2 × |52.7 - 50| = 5.4c
• quoted spread = 4c
Interpretation: you paid more than the spread suggests. The extra 1.4c is slippage and impact embedded in the fill.
Common mistakes
Assuming the top of book is your price: depth matters.
Using market orders by default: thin markets punish market orders.
Ignoring exits: slippage can be worse on exit, which drives round trip cost.
Blaming luck: slippage is often structural and measurable.
Related
• How to Compute VWAP from Multiple Fills
• Slippage