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Slippage
Slippage takes either piranha-sized or shark-sized bites out of your account whenever you enter and exit the markets. Slippage means having your orders filled at a different price than that which existed when you placed an order. It is like paying 30 cents for an apple in a grocery store even though the posted price is 29 cents.There are three kinds of slippage: common, volatility-based, and criminal. Common slippage is due to a spread between buying and selling prices. Floor traders maintain two prices in the market — the bid and the ask.
For example, your broker may quote you 390.45 for June S&P 500. If you want to buy a contract at the market, you’ll have to pay at least 390.50. If you want to sell at the market, you will receive 390.40 or less. Since each point is worth $5, the 10-point spread between bid and ask transfers $50 from your pocket to floor traders. They charge you for the privilege of entering or exiting a trade.
The spread between bid and ask is legal. It tends to be narrow in big, liquid markets such as the S&P 500 and bonds, and much wider in thinly traded markets such as orange juice and cocoa. The exchanges claim that the spread is the price you pay for liquidity — being able to trade whenever you wish. Electronic trading promises to cut slippage.
Slippage rises with market volatility. Floor traders can get away with more in fast moving markets. When the market begins to run, slippage goes through the roof. When the S&P 500 rallies or drops, you can get hit with a 20 to 30 point slippage, and sometimes 100 points or more.
The third kind of slippage is caused by criminal activities of floor traders.
They have many ways of stealing money from customers. Some put their bad trades into your account and keep good trades for themselves. This kind of activity and other criminal games . When a hundred men spend day after day standing shoulder to shoulder in a small pit, they develop a camaraderie — an “us against them” mentality. Floor traders have a nickname for outsiders which shows that they consider us less than human. They call us “paper” (as in “Is paper coming in today") . That is why you have to take steps to protect yourself.
To reduce slippage, trade liquid markets and avoid thin and fast-moving markets. Go long or short when the market is quiet. Use limit orders. Buy or sell at a specified price. Keep a record of prices at the time when you placed your order and have your broker fight the floor on your behalf when necessary .
