Forex slippage and why it can be regarded as a positive phenomena
Slippage, in trading terms, can best be described as having an order filled at a different price to the price initially quoted on the trading platform. However, slippage should be regarded as a positive indication that the market and the trader's chosen market access, is operating in a transparent and efficient manner.
Traders can experience their orders filled in three possible ways; at the exact price quoted, experience negative slippage - whereby their order is filled at a price not in their favour, or experience positive slippage - when the order is filled at a better price than the price originally quoted. The fact that slippage exists should actually be regarded as positive reinforcement that the trader is engaging with a highly efficient, fair and transparent marketplace. Particularly in respect of ECN straight through processing, it would in fact be highly unusual and indeed suspicious, if traders' orders were always filled at the exact price quoted.
In such a marketplace as FX, turning over circa $5 trillion each weekday and executing hundreds of millions trades per day, it is a natural occurrence and reasonable expectation that not all orders can possibly be matched perfectly in such an environment. In a fair and transparent ECN trading environment, the pool of liquidity providers provide the FX quotes, the volatility can change suddenly and dramatically. Therefore, an order is matched instantaneously at the best possible price available, occasionally at the price quoted, or potentially at a better price than expected.
Let's finish by explaining how positive slippage (also known as price improvement) can work in a trader's favour.
For example, a trader places an order to BUY 1 lot of EUR/USD at the market price of 1.35050, the order was sent out through the MetaTrader platform to the liquidity provider and then the confirmation message comes back informing the trader that the order was executed at 1.35045. Through the ECN/STP model the trader has experienced positive slippage, they have been filled at a better price, a price more favourable to their initial order.
Slippage = 1.35050 - 1.35055 = -0.00005 -> -0.5 pip EURUSD = -5 USD