Slippage is a totally normal phenomenon in trading as market participants compete for the best prices. In prediction markets, this shows up often enough to catch traders off guard, especially during periods of volatility such as a news event.
Understanding how it occurs can enable you to reduce its negative impact, while potentially maximizing your returns. This guide aims to shed some light on the concept of slippage in prediction markets, as well as proven tactics to avoid it.
What is slippage
Slippage is the difference between the price you expect when placing a trade and the price you actually receive.
Market mechanics
It’s worth pointing out that slippage doesn’t automatically mean something has gone wrong. Any gap between the price you intended to trade at and the price you actually received counts as slippage, whether that gap works in your favor or not.
When you place an order, your trade gets filled at the best available price at that moment. Depending on market conditions, the confirmed price could be better or worse, based on what’s happening in the order book when the order is matched.
Positive and negative slippage
Like in financial markets, slippage in prediction markets can cut both ways:
- Positive slippage means you walk away with a better price.
- Negative slippage means you end up paying more.
Getting your head around this important difference can help you trade with consistency.
Role of AMM
Here’s where prediction markets add their own twist. As most decentralized markets run on automated market makers (AMMs) rather than traditional order books, prices can shift between the moment you click “confirm” and the moment your trade actually goes through.
The thinner the liquidity pool, the more your order can move the price against you as it’s being filled. This is sometimes called price impact, as slippage plays out in real time.
What cause slippage in prediction markets
The following scenarios are where slippage is mostly likely to strike in prediction markets.
Large positions
Slippage happens when someone puts through a large position and the available liquidity can’t hold up at the requested price. This is also called “walk the book” as the order is filled at next available prices in the order book.
For example, a market about a top contender is pricing a “Yes” at $0.62 per share. You put in a market order for 1000 shares, expecting to pay $0.62 each. But the current liquidity only has 300 shares for that price.
Since your bid is larger than the available offer, the price shifts upward as your next 700 shares work through the book and get filled at $0.63, $0.64 and so on. Your average price may end up at $0.64 per share. That $0.02 difference across 1000 shares adds up to $20 in negative slippage.
News events
Prediction markets are particularly exposed to slippage around breaking news. When a major piece of information is released, say a politician resigns or an economic report beats expectations, odds reprice almost instantly.
If you try to enter or exit during that window, you’re much more likely to receive a price that differs significantly from what you were looking at on your screen a second earlier. Because platforms will fill your order at whatever price is available due to slight refresh delay and fast price movement.
How to avoid slippage
These are practical ways to prevent slippage from chipping away at your profits.
Use limit orders. This is the easiest way to remove negative slippage. By setting a price floor (or ceiling) on your sell (or buy) order, you make sure that you will not be filled at a worse price. The downside is that your order might not go through if the market moves away, so you’ll need to consider how urgently you want the position.
Trade during quieter times. The less activity swirling around a market, the more stable the prices tend to be. Do your best to avoid placing large orders during major news as prices can jump around dramatically, causing sharp slippage.
Size orders accordingly. Always keep the current liquidity in mind. Breaking a large order into smaller chunks and spreading them out over time can reduce the price impact.
Coming back to our example on the 1000 shares at $0.62. If the price had moved down and filled your limit order at $0.60, that’s $20 in positive slippage, a pleasant surprise.
Wrapping up
Slippage is a natural part of trading prediction markets, not something about the market or the platform has broken. It hits wherever liquidity can’t keep up with price movements.
By grasping this simple concept, you can pick your trading session, order type, and position size wisely. A little awareness goes a long way toward keeping slippage from eating into your returns.
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