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# Price Impact and Slippage

## What is Price Impact?

Price impact refers to how much the price of an asset moves due to a trader's order consuming liquidity at various price levels in the order book.

### Mechanism

* An orderbook consists of **limit orders** at various prices. The best available price for a buyer is the lowest ask, and for a seller, it's the highest bid.
* When you place a **market order**, it consumes liquidity starting from the best available price and moves deeper into the order book as necessary to fulfill the order.
* The larger the market order, the more price levels it will sweep, leading to a greater price impact.

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## What is Slippage?

Slippage is the deviation between the expected price of a trade (based on the top of the orderbook) and the actual average price at which the trade is executed.

### Mechanism

* Slippage occurs due to **price impact** (trading across multiple price levels in the book) and/or **market conditions** like volatility.
* The key factors affecting slippage are:
  1. **Order Size**: Larger orders consume more of the orderbook, resulting in more slippage.
  2. **Market Liquidity**: Thin orderbooks with low volume at each price level exacerbate slippage.
  3. **Volatility**: Rapid price changes during execution can lead to unexpected outcomes.

#### Example

| Price Level | Ask Price | Ask Size |
| ----------- | --------- | -------- |
| 1           | 100,000   | 10       |
| 2           | 100,010   | 5        |
| 3           | 100,030   | 10       |

If I submit a market order of size 20, I will get the following fills :

* 10 at a price of 100,000
* 5 at a price of 100,010
* 5 at a price of 100,030

The price impact in this case was \$30.

The average fill price is :

(100,000 \* 10 + 100,010 \* 5 + 100,030 \* 5) / 20 = 100,010

So the slippage relative to best ask price was \$10

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## How can I minimize my slippage?

* **Limit Orders**:
  * Place [limit orders](./placing-orders/order-types/limit-order) at desired prices to avoid price impact and control slippage.
  * Note: This risks the order not being filled if the market doesn’t reach your limit price.
* **Order Splitting**:
  * Break large orders into smaller chunks and execute them over time to reduce price impact.
  * [TWAP](./placing-orders/order-types/twap-order) (Time-Weighted Average Price) can help to do this in an automated way
* **Use Market Depth**:
  * Analyze the orderbook depth to estimate how much liquidity is available at each price level before placing large orders.
* **Set [Maximum Slippage](./slippage)** :
  * Define a maximum acceptable slippage to avoid orders executing at unexpectedly poor prices.