Spread in trading and slippage: what every trader needs to know

Why it is important to understand

When you make a trade on a cryptocurrency exchange, the actual execution price often differs from what you saw at the time of placing the order. This occurs due to two key factors: the spread in trading and slippage. Understanding these phenomena is a critically important skill for anyone serious about trading crypto assets.

Basics of the Spread Between Supply and Demand

The spread between the bid and ask is the difference between the highest price a buyer is willing to pay (bid price) and the lowest price a seller is willing to accept (ask price). This difference is reflected in the order book of each exchange.

When you want to make an instant purchase, you need to accept the lowest available ask price. When selling, the highest bid price. The more liquidity in the market, the tighter the spread between these values.

High liquidity means that many traders are buying and selling an asset simultaneously. As a result, the difference between them decreases. For example, in the forex market, spreads are much narrower than those of illiquid crypto assets, precisely because trading volumes there are many times higher.

How Market Makers and Spread Work

In traditional financial markets, liquidity is primarily provided by brokers and market makers. In the crypto space, market makers also play a key role, but the mechanism is slightly different.

A market maker simultaneously buys and sells the same asset, profiting from the difference. For example, they buy BNB for $800 per coin and immediately sell it for $801 —the spread is $1. By executing such operations thousands of times a day with large volumes, the market maker achieves stable profits even with small spreads.

Due to competition among market makers, high-demand assets ( such as Bitcoin and Ethereum ) have narrower spreads. Lesser-known tokens and altcoins often suffer from wide spreads precisely because few are willing to act as market makers for them.

Calculating the spread percentage

To correctly compare the spreads of different assets, they need to be calculated in percentages, not in absolute values. The formula is simple:

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

Let's take the meme token TRUMP. At the time of writing, the ask was $9.44, the bid was $9.43. A spread of $0.01 gives us: 0.01 / 9.44 × 100 = 0.106%.

Now let's compare with Bitcoin. If the absolute spread of BTC is $1, and the price is around $118 000, then the percentage spread will be approximately 0.0008% — much lower, despite the absolute value being higher.

Conclusion: assets with a smaller percentage spread are usually much more liquid. When executing large market orders on such assets, the risk of overpaying is minimal.

What is slippage

Slippage is the phenomenon when your trade is executed at a price different from what you expected. It occurs particularly often in markets with low liquidity or high volatility.

Imagine: you place a market order to buy $100 worth of an altcoin. But there is not enough volume at the price you need in the order book. The exchange begins to “unfold” your order, sequentially taking the next orders at increasing prices until the entire amount is filled. As a result, the average price of your purchase turns out to be higher than the initial $100.

Slippage is a particularly acute problem when working with automated market makers and decentralized exchanges. On some illiquid altcoins, slippage can exceed 10% of the expected price.

When slippage works in your favor

Slippage is not always negative. Positive slippage occurs when the market moves in your favor during the execution of an order. For example, if you placed a buy order and the prices have decreased in the meantime—you will receive the order at a price lower than expected. This is a rare occurrence in volatile markets, but it does happen.

Slippage Protection

Some exchanges allow setting a maximum allowable price deviation — a resistance level against slippage. This feature is available in popular decentralized protocols.

If a low tolerance level is set, execution may take a long time or may not happen at all. If too high a level is set, there is a risk that another trader or bot will gain priority through the front-running mechanism ( by setting a higher gas fee ).

How to Minimize Negative Impact

Although it is not always possible to completely avoid slippage, there are practical methods to reduce it:

Break large orders into smaller parts. Instead of placing one large order, create several smaller ones. Pay close attention to the volume in the order book and avoid placing orders that exceed the available volume at the current price.

Consider the fees. On decentralized exchanges, transaction fees ( can be quite significant, especially in congested networks ). Sometimes they completely offset potential profits.

Choose liquid assets. Trading low-liquid tokens or small liquidity pools means that your actions can significantly affect the price. Whenever possible, choose markets with high trading volumes.

Use limit orders. A limit order is executed only at the price you specify or better. This is a reliable way to avoid slippage, although you may have to wait for the order to be filled.

Key Takeaways

The spread between the bid and ask and slippage are hidden costs of trading that are often underestimated by beginners. While their impact is minimal on small orders, they can significantly affect your average execution price when dealing with large amounts.

It is especially important to understand the mechanics of slippage if you are actively trading on decentralized platforms. Ignorance of these fundamentals is a common reason for losses due to unexpected execution prices and front-running.

Develop the habit of analyzing the order book before placing large orders, monitor slippage tolerance levels, and remember: in the long run, attention to trading details often proves to be more important than attempting to guess the market direction.