Spread and Slippage: Two Costs Traders Must Understand

Key Points

• Bid-Ask Spread (бід-аск): The difference between the highest buy order and the lowest sell order, directly affecting your trading costs
• Slippage (прослизання): The deviation between your actual transaction price and the expected price, common in highly volatile or low liquidity markets
• Both are hidden trading costs, often more easily overlooked than explicit fees

Understanding Market Pricing Mechanisms

When you buy or sell assets on a cryptocurrency exchange, prices are determined by market supply and demand. But besides the price itself, several factors influence whether you can execute trades at your expected price: trading volume, market liquidity, order types used, and current market volatility.

In practice, you may not always get the price you expect. This is because there is ongoing price negotiation between buyers and sellers, leading to a gap between their quotes—that’s what we call the bid-ask spread. Additionally, if the market is highly volatile or liquidity is insufficient, you may encounter slippage, meaning the final transaction price differs from your initial expectation.

Therefore, understanding the exchange’s order book mechanism in depth before trading is crucial for risk mitigation.

The Nature and Formation of the Bid-Ask Spread

The bid-ask spread refers to the distance between the highest bid and the lowest ask in the order book. In traditional financial markets, this gap is usually maintained by market makers or brokers. In crypto markets, the spread directly results from differences in limit orders submitted by buyers and sellers.

Want to buy an asset immediately? You need to accept the seller’s minimum asking price. Want to sell instantly? You will get the highest price a buyer is willing to pay.

Liquidity and the Bid-Ask Spread Relationship

Assets with ample liquidity (like mainstream coins) tend to have narrower spreads because many buy and sell orders are densely packed, limiting price movement. Conversely, assets with lower trading volume often have wider spreads, and executing large orders can cause more significant price swings.

How Market Makers Use the Bid-Ask Spread

Liquidity is vital in financial markets. Without sufficient liquidity, traders may wait a long time to find counterparties. Market makers address this by providing liquidity—they profit simply by buying and selling simultaneously, earning the spread.

For example, a market maker might quote: buy at $800, sell at $801—earning a $1 profit per trade. With high trading volume, even small profits per trade can accumulate into substantial earnings. Popular assets attract more market makers competing to narrow the spread, ultimately creating a tighter bid-ask gap.

Understanding the Spread Through the Order Book Depth Chart

To observe the actual bid-ask spread, you can look at the exchange’s order book depth chart. This chart shows:

• Green area: buy orders’ prices and quantities
• Red area: sell orders’ prices and quantities
• Gap between the two: the bid-ask spread

The farther apart the green and red areas, the larger the spread; the closer they are, the narrower the spread.

Generally, assets with higher trading volume have smaller spreads; those with lower volume have wider spreads. This again confirms the direct relationship between liquidity and the bid-ask spread.

Calculating the Spread Percentage

To fairly compare spreads across different assets, express them as a percentage:

Spread% = (Ask Price - Bid Price) / Ask Price × 100

For example:

An asset’s ask price is $9.44, bid price is $9.43, absolute spread is $0.01.
Calculation: (0.01 ÷ 9.44) × 100 ≈ 0.106%

Looking at Bitcoin: suppose the spread is $1, which seems much larger than the previous example. But as a percentage (1 ÷ 50,000 ≈ 0.002%), it’s only about 0.002%.

This shows that assets with larger absolute spreads do not necessarily have higher relative spreads; the key is the percentage. Low-liquidity assets tend to have higher percentage spreads.

What Is Slippage?

Slippage is a common phenomenon in trading, especially in markets with high volatility or low liquidity. Slippage refers to the deviation between the actual transaction price and the expected price.

Suppose you want to buy an asset at $100, but the market lacks enough sell orders at that price. Your order continues to match subsequent sell orders (possibly at $100.5, $101, etc.) until fully filled. Your average purchase price may end up higher than $100—that’s slippage.

Simply put: When you place a market order, the exchange automatically matches you with the best available prices from the order book. But if the depth at that price isn’t sufficient, it must continue to the next price levels, potentially resulting in a non-expected execution price.

Two Aspects of Slippage

( Negative Slippage (more common)

Buying at a higher price, selling at a lower price. This is common in high-volatility or low-liquidity markets; some small tokens can have slippage over 10%.

) Positive Slippage (less common)

Market moves favorably, such as when placing a buy order and the price drops, or placing a sell order and the price rises. This can happen occasionally in extremely volatile markets.

Managing Slippage

Set Slippage Tolerance

Many automated trading platforms allow you to manually set a “maximum acceptable slippage,” telling the system “I accept a deviation of up to X%.” This is common on liquidity aggregator platforms.

Note: Setting too low a tolerance may result in orders not executing or taking too long; setting too high can be exploited by front-runners.

Split Large Orders

Avoid submitting large orders all at once. Instead, break them into smaller batches, each within the order book’s capacity. Carefully observe the order book depth to prevent exceeding available liquidity per order.

Choose High-Quality Liquidity Markets

Assets with low liquidity are inherently riskier. If there’s no specific reason, prioritize trading pairs with high trading volume and many participants.

Use Limit Orders Preferably

Unlike market orders, limit orders only execute at your set price or better. Though they may take longer to fill, they are the most reliable way to avoid negative slippage.

Pay Attention to On-Chain Costs

When trading on decentralized exchanges, don’t forget to account for network fees. Some blockchains have very high transaction fees that can eat into your trading profits.

Summary of Key Points

Bid-ask spread and slippage are both hidden trading costs that are often overlooked by beginners. While impossible to eliminate entirely, understanding market mechanisms and choosing appropriate strategies can minimize their impact.

For small trades, these costs may be negligible, but for large orders, the average execution price can be far higher than expected. This is especially important for investors involved in on-chain trading—lack of basic knowledge can lead to significant losses due to slippage and front-running.

Remember: every trade should consider these hidden costs, which often have a greater impact than explicit fees.