This article will help provide a simple explanation as to what the terms slippage and re-quotes refer to when dealing with online brokers, whether trading electronically or using a voice broker.
As financial markets brokerage firms aim to provide quality execution when handling customer orders across various asset classes and trading instruments, the varying types of orders and exchange rules or brokerage policies may drastically differ from one venue to the next, and thus can greatly affect the function of orders and rules governing how such orders are handled.
One common challenge is executing an order at the rate that was requested by the client –such as in the case of a limit order, or the next available market rate as in the case of a market order.
The Essence of Slippage: Change in Rate Between Requested Price and Executed Price
Regardless of the order type and rules of the exchange or broker, if the venue is not able to execute the order at the price requested and a worse price is provided, this is referred to as negative slippage.
In the case of a price improvement or better-than-expected rate than was requested, the slippage is described as positive.
Essentially, slippage is the difference between the rate requested and the rate executed, and is typically due to the fact that prices across various financial instruments often change rapidly in milliseconds or less, sparked by trading volumes, market volatility and the large size of markets (and the accompanying large number of participants). Thus slippage can occur even at the most technically sophisticated brokerages, and not a limitation in a providers system.
Latency and Fast Markets
The specific reason for slippage occurring is a time-delay between when an order is submitted and when an order is received, and to when an order is processed, even when this is done electronically – at the speed or light.
The internet speed/quality and geographic distances between servers, as well as the time needed by the servers to process such operations, all add to the potential latency that can cause rates to change, and thus cause a trade to be slipped either positively or negatively.
In even a shorter period of time, a rate can have already changed a moment after it was displayed, making it no-longer executable or no-longer valid (and thus a stale price –that would cause either slippage or a re-quote to occur).
In the case of a broker only providing negative slippage and never providing positive, such practice is often frowned upon by regulators and described as Asymmetrical slippage. If slippage is to occur, it must be symmetrical, so the positive slippage should be passed on to customers- if the negative slippage is also passed on.
Re-quotes Are Similar to Slippage, Except Trader Decides Whether to Accept or Not
Similar to Slippage, a re-quote occurs when instead of slipping a trade, the broker presents the customer with the option to execute the trade at a different rate than the one they requested- when in such cases the rates originally requested are no longer available. For example, if the EUR/USD rate is Bid 1.3422 and Ask 1.3423, and a client submits a market order to buy at the ask price, the trading platform may re-quote the trade automatically at 1.3424 – if the rate has changed around the time the trader clicks submit/enter to confirm the original order (submit it for execution).
While the details of this process may vary across brokers and depend on their specific policies, the essence is the same in how the re-quoted rate may be more favorable or less-favorable (negative or positive) than the original rate requested.
When dealing with complaints related to slippage or re-quotes, the Financial Commission will examine the rate logs, trade logs, tick-price history or other such data provided by the member broker in order to ascertain the degree of slippage if any and whether it was positive/negative, as well as if the slippage was justified (comparing rate providers). Finally, slippage if and when it should occur, must be symmetrical for the sake of providing clients with fair dealing.