Spread on the exchange and slippage: what a trader needs to know

Core Concepts

When you make trading operations on a cryptocurrency exchange, it is important to understand two key phenomena that directly affect your profits or losses. Spread is the financial gap between the price at which asset holders are willing to sell and the price at which investors are willing to buy. Slippage, on the other hand, occurs when a transaction is completed at a price that is not what you expected.

Both of these phenomena are directly related to market liquidity. In healthy and active trading venues with high trading volumes, there is usually a minimal spread and significant slippage rarely occurs. This indicates healthy competition among market participants.

How the spread between supply and demand functions

The spread on an exchange is the difference between the lowest price at which sellers are willing to release their assets (ask price) and the highest price that buyers are willing to offer (bid price). This difference is automatically calculated from the limit orders placed by real traders in the order book.

Imagine you want to make a quick purchase: you will have to agree to the lowest ask price available in the market. If you are in a hurry to sell, you will accept the highest bid price offered by the other party. The gap between these prices is what comes out of your pocket.

In highly active trading markets, where millions of users participate, the spread is usually very small. For example, popular Bitcoin may have a spread of just a few cents. Less traded altcoins often have a spread of several percent of their value, which significantly impacts the economics of the trade.

The Role of Market Makers in Spread Formation

Liquidity is the lifeblood of any financial market. In illiquid markets, your order can remain unmatched for months. To avoid such a scenario, special participants known as market makers have emerged in traditional markets.

A market maker is a trader or company that simultaneously places bids for both buying and selling the same asset. Their profit is based on the spread: they buy at a lower price and immediately sell at a higher price. Even a $1 spread can bring them millions a day if they handle huge volumes.

Let's consider a real example: a market maker simultaneously buys BNB for $800 per coin and offers to sell it for $801. The spread is $1. Any trader who wants to instantly enter or exit a position is forced to accept these terms. This is pure arbitrage.

Interestingly, competition among market makers reduces the spread. Active assets with high demand attract many market makers who compete for clients, constantly reducing their spread. So, the popularity of an asset guarantees a narrow spread.

Spread Measurement: Percentage Analysis

To compare the spreads of different assets on a fair basis, traders use a percentage metric. The formula is simple:

(Ask price – Bid price) / Ask price × 100 = Spread percentage

Let's consider a specific example. Take the relatively new coin TRUMP: at the time of analysis, its ask price was $9.44, and the bid price was $9.43. The difference is $0.01. Let's apply the formula: $0.01 ÷ $9.44 × 100 = 0.106%. A very narrow spread!

Now let's consider Bitcoin with an absolute spread of $1. It sounds like more, but let's calculate the percentages: $1 ÷ 50,000 ( approximate price ) × 100 = 0.002%. This is much less than 0.106% for TRUMP!

Why is there such a difference? TRUMP has a much lower trading volume than Bitcoin, which is why its liquidity is lower. This confirms the basic principle: high percentage spreads are typically observed in illiquid assets. Assets with narrow spreads demonstrate high liquidity, which means a lower risk of overpaying with large volumes.

What is slippage and why does it occur

Slippage is the phenomenon when your trade is executed at a price that is completely different from what you expected. This most often occurs in volatile markets or when trading illiquid assets.

Scenario: you place a large market order to buy worth $100. However, there are not enough sellers in the market willing to release the required volume at that price. The system starts automatically matching orders at increasing prices: the first $20 at $100, the next $30 at $101, the rest $50 at $102. Result: you bought at an average price of $101.30 instead of the expected $100.

This is particularly acute on decentralized platforms and automated market makers, where liquidity can be unstable. Slippage there can reach 10-15% or even more for exotic altcoins.

The process works like this: when you create a market order, the exchange scans the order book and offers you the best prices. But if there isn't enough volume, the system is forced to dig deeper into the order book, encountering higher prices.

Sometimes slippage works in your favor

Paradoxically, slippage can be positive. If prices drop while you are placing your buy order, you will receive the asset cheaper than expected. Similarly, if the market rises during your sale, you will receive more money. Such moments are rare, but they occur in high volatility.

Slippage Protection

Many decentralized platforms allow users to manually set a slippage tolerance — the maximum deviation from the expected price in percentage. This acts as insurance.

However, there is a dilemma here: if you set the tolerance too low, the order may not be executed at all. If you set it too high, you risk becoming a victim of front-running, where another participant outpaces you by setting a higher gas fee and purchasing the asset first, and then immediately selling it to you at a favorable price.

Practical methods for reducing losses

Although it is impossible to completely avoid slippage, there are proven methods to minimize it.

Breaking large orders is one of the most effective methods. Instead of one large order, break it into several smaller ones. Carefully monitor the market depth: do not place volumes that exceed the available liquidity at the current price level.

Monitoring network fees is especially important when working with decentralized exchanges. High gas fees on congested blockchains can completely eat into your margin. Check the network conditions before trading.

Choosing high liquidity assets is a strategic choice. If you are working with a little-known altcoin with a tiny liquidity pool, your trade can shift the price by tens of percent. It is better to choose markets where you can open and close your position without pain.

Limit orders instead of market orders — a reliable protection. A limit order is executed only at the specified price or better. You may wait longer, but you will avoid unpleasant surprises. This is especially critical when trading large amounts.

Final Recommendations

The spread on the exchange is an inevitable part of trading, and slippage can turn potential profits into losses. Although it is impossible to completely avoid them, a conscious approach helps protect capital.

In small orders, these effects are almost imperceptible. But when you move on to working with serious amounts, the average price of your trade can differ significantly from expectations. This is especially true in decentralized finance, where conditions are unstable.

Beginner traders need to understand: front-running and negative slippage are not theories, but real threats to your portfolio. Without basic knowledge of market mechanics and the nature of liquidity, you will systematically overpay. Take the time to study these fundamentals - it is an investment in your trading profitability.