Spread is the immediate gap
A buyer crossing the spread pays the best ask, while a seller crossing it receives the best bid. Wider spreads increase the cost of immediate entry and exit.
Depth determines capacity
A market can show a tight spread but little quantity at the best prices. Large orders then consume multiple rows and receive a worse volume-weighted average price.
Slippage grows under pressure
Order size, volatility, latency, and disappearing liquidity can all increase slippage. Review expected execution before submitting a position that is large relative to the market.
Liquidity has several dimensions
A narrow spread is helpful but incomplete. Traders also examine depth, trading frequency, volume, and open interest. A market can show a tight top-of-book spread yet have too little size to absorb a large order without substantial impact.1
Slippage should be measured against a defined benchmark, such as the mid-price when the order was sent, and separated from explicit fees. During fast markets, latency and protective price bands can create partial fills as well as worse prices.34
Decompose an execution result
For a buy, start with the mid-price when the order was sent. Half the quoted spread is the cost of crossing to the ask in a stable book. Walking through higher asks adds depth impact. Movement while the order is in transit adds timing cost. Fees are then added separately.14
This decomposition helps distinguish a normal cost of immediacy from unusually poor routing or a stress event. It also supports better sizing because the same quantity can have very different impact across markets and sessions.1