Quick Facts About How Slippage Works
- Slippage is the difference between the contract price you want and the fill price.
- It could be positive or negative.
- Slippage is mostly caused by market volatility, significant bid-ask spreads, liquidity, and wrong trade timing.
- You can reduce slippage by keeping your trading goals realistic, using your orders strategically, and trying trading tools.
- Kalshi, Crypto.com, and Polymarket are 3 trusted CFTC prediction market sites to trade at.
A Refresher Course on Event Contract Trading
Before I answer the question “What does slippage mean?” Here’s a quick refresher of how event contract trading works. Trading event contracts at prediction market sites regulated by the Commodity Futures Trading Commission (CFTC) is fast becoming an alternative to betting at iGaming sites.
When trading event contracts, you’ll be buying or selling Yes/No event contracts that are based on the outcome of real-world events.
These contracts are binary, and many settle at $1 if an event occurs (Yes) or $0 if it doesn’t (No), based on market rules. An event contract’s price shows what other traders think about the likelihood of that event occurring, and isn’t fixed by the prediction site. Your positions on event contracts take the form of orders, which tell the market how you intend to trade your contracts.
Stop orders “ask” the market to fill (more on this later) your order as soon as the price hits your stop level. On the flip side, limit orders allow you to set the price you’re willing to buy or sell at. That’s the main gist about trading event contracts.
However, there’s an aspect of event contracts that doesn’t get talked about nearly as much as it should. It’s called slippage, and I’ll be telling you everything you need to know about it in this guide.
What Does Slippage Mean in Trading?
When you place an order at a prediction market site (take a “Yes” or “No”) and it goes through, a counterparty then takes their position, leading to what’s called a fill. A fill is basically the actual price at which the trade was completed.
However, there might be a difference between the contract price you wanted (or expected) and the fill price. That difference in contract pricing is what’s known as slippage. Here’s a real-life illustration. Let’s say you just watched a World Cup game at a stadium and you’re looking to get home via a car-hailing service. So, the fare on the app is $10 one moment, but jumps to $50 just before you confirm the trip.
The same thing happens at prediction markets, where contract prices are determined by market forces. You click “Buy” (for instance) one moment, but by the time your order gets to the exchange, the markets have moved from where they were at the time you placed the order, and the prices follow suit.
Types of Slippage in Event Contract Trading
To fully grasp what slippage is, you’d need to understand its types. Here’s how they work:
Negative Slippage
This is the most common type of slippage that occurs in the trading space. It happens when a trade order fills worse than expected. For instance, the ask price rises before a long position fills, or the bid price falls before a short position is filled.
Positive Slippage
With positive slippage, trade orders fill out at a price that’s better than what was expected. Examples of this include the ask price falling before a long position is filled or a bid price rising before a short position is filled.
4 Main Reasons Why Trading Slippage Occurs
Slippage is an inevitable aspect of trading contracts, and it’s important to understand why it occurs. Here are some of the reasons:
Volatility
Contract prices are determined by market forces, and during volatile periods, prices can change within seconds. Some of the things that easily influence event contract prices include breaking news, official releases, and central bank decisions.
Bid-Ask Spreads
When there’s a significant difference between an ask price and a bid price, there’s a potential for slippage. Just in case you don’t already know, an ask price is what a contract seller is willing to accept. The bid price, on the other hand, is what a buyer is willing to pay.
Liquidity
One of the top reasons for slippage during trades is liquidity. When you trade event contracts that don’t have enough traction in the market (by this, I mean not having enough buyers and sellers), you risk experiencing negative slippage. And that’s because for your order to be filled, it may need to be filled at lower prices.
Trade Timing
As overlooked as this might be, trading when fewer traders are active can lead to negative slippage. Some of the things that could happen during these periods include lower trading volume and significant bid-ask spreads.
3 Tips to Help You Reduce Negative Slippage in Trading
So, having described what slippage is, its causes, types, and why you should avoid it, here’s the part of this review where I offer tips on how to minimize negative slippage. Granted, slippage is inevitable, but hopefully, the following tips can help you minimize it:
Keep Your Goals Realistic
By “goals,” I mean trading goals. The idea is to understand the market you’re trading in (its volatility, etc.) and factor in the potential for negative slippage. Let’s say you’re trading event contracts in a volatile category like geopolitics; there are bound to be unexpected turns that could lead to “negative” price fluctuations. So, expect these turns and make plans to reduce slippage tolerance.
Use Your Orders Strategically
You could also use your orders to manage negative slippage. I use limit orders to specify the price I’d like to trade an event contract at. It helps prevent my order from being filled at a price that could lead to negative slippage. However, there’s a risk of the order not being filled if the price limit isn’t reached.
Experiment With Trading Tools
If you’re one of those traders who like to go it alone when trading contracts, here’s some advice: try trading tools. Many prediction market sites regulated by the CFTC offer trading tools that could help minimize negative slippage.
3 Prediction Market Sites That You Might Want to Check Out
Having provided a definition of slippage, among other things, in this guide, here’s the part where I describe three prediction market sites where you could trade event contracts.
Kalshi – Get Access to 10+ Trading Categories
So how does Kalshi work? It’s a prediction market site with 10+ categories and loads of sub-topics to trade on. New traders are welcomed with a $10 welcome bonus after they’ve traded event contracts worth $10. I recommend reviewing the Kalshi fees schedule before signing up.
Crypto.com – Flexible Payment Options
Besides its selection of sports prediction markets, Crypto.com made this list because you can trade contracts using traditional currencies and an impressive collection of cryptocurrencies. It charges a $0.02 trading fee for contracts with a $1 size and doesn’t have a welcome bonus for contract trading.
Polymarket – Intuitive Website and Fluid App
If you’re in the US, you’ve probably asked the question “How does Polymarket work in the US?” Here’s your answer. You can now trade on the site via its very fluid iOS app. I also like its intuitive website and how easy it is to use.
Pros and Cons of Understanding How Slippage Works
Why is it important to have a grasp of how slippage works? Here are the pros and cons of doing so:
Pros
- Improves your trading competence.
- Helps manage slippage.
- Reduces avoidable losses.
Cons
- Doesn’t eliminate slippage entirely.
Before rounding this guide up, here are the dos and don’ts of minimizing slippage.
| Dos | Don’ts |
|---|---|
| Set realistic goals | Ignore trading tools |
| Use limit orders to specify contract prices | |
| Use stop orders to tolerate slippage and minimize potential losses |
Conclusion – Knowing What Slippage Is Can Improve Trading
Before I finally understood what slippage was and how it affected my trading performance, I struggled with trading event contracts successfully. Thankfully, I finally figured out that there were negative and positive slippages and that it was negative slippage that caused my frustrations.
Further study revealed that market volatility, significant bid-ask spreads, liquidity, and wrong trade timing were the main causes of negative slippage.
After some more mistakes and research, I arrived at ways to reduce negative slippage. These include keeping my trading goals realistic, using my orders strategically, and using trusted trading tools.
It’s possible to trade event contracts with minimal negative slippage. The first step is to use the tips I’ve described here. You could also click on the on-page banners to find reputable prediction market sites to trade at.
