Bid–Ask Spread, Liquidity & Slippage
Hook
You tap Buy at ₹100—but the fill shows ₹100.35. What changed? Three invisible forces shape every trade you place: the bid–ask spread, liquidity (order-book depth), and slippage. Master these and your trades get cheaper, calmer, and more controlled.
Key Takeaways (read first)
- Bid = best price a buyer will pay; Ask = best price a seller will accept. Spread = Ask − Bid (your “instant cost” when you cross it).
- Liquidity comes from market depth—quantities available at each price level. Deep books = less price jump on execution.
- Slippage is the difference between the price you expected and the price you actually get. It rises with wide spreads, thin depth, big orders, and high volatility.
- Reduce slippage by trading liquid instruments, using limit orders for entries, avoiding thin/auction times, and sizing orders sensibly.
1) Bid–Ask Basics (the first friction)
The order book dept pairs buyers (bids) with sellers (asks).
- Bid: highest price buyers are offering now.
- Ask/Offer: lowest price sellers will take now.
- Spread: the gap between them. If you submit a market buy, you “cross the spread” to hit the ask; a market sell hits the bid.
Example
- Bid: ₹99.90 × 1,500
- Ask: ₹100.00 × 1,200
- Spread: ₹0.10
A small market buy likely fills at ₹100.00. A larger order may chew through the ₹100.00 ask quantity and continue to higher asks, increasing the average execution price.
2) What creates (and widens) the spread?
- Liquidity: Thin participation widens spreads; liquid large caps/ETFs often have tight spreads.
- Volatility & news: Faster moves = wider spreads as makers protect themselves.
- Auction/open/close: Around auctions, books can be thin or imbalanced.
- Tick size & fees: Market microstructure matters; some instruments naturally sit a tick wider.
Rule of thumb: prefer instruments where the spread is only a few ticks and stays tight through the day.
3) Liquidity & Market Depth (L1 vs L2)
- Level 1 (L1) shows best bid/ask and LTP (last traded price).
- Level 2 (L2) shows multiple price levels and quantities—this is depth. Deep, balanced depth on both sides absorbs orders with minimal price impact.
Why depth matters
- Shallow books have air gaps—prices jump when your order consumes visible quantities.
- Deep books let even mid-sized orders fill near the top of book, reducing slippage.
4) Slippage: why your fill moves
Slippage = Executed Price − Expected Price (for buys; reverse the sign for sells).
It increases when:
- You use market orders across wide spreads.
- Your order size exceeds the top-of-book quantity.
- Volatility spikes while your order is active.
- The instrument is illiquid (thin depth).
Practical notes
- Slippage can work for you on the sell side during favorable moves—but don’t count on it.
- In fast markets, stop-market exits can slip more (certainty of exit, not price).
- Stop-limit caps exit price but may not fill in a fast drop—use carefully.
5) Order Types & execution quality
- Market: fastest fill; lets price float to whatever clears. Great for urgent exits, risky in thin names.
- Limit: you pick the price; if the market doesn’t trade there, your order won’t fill. Best for entries and calm conditions.
- SL-M (stop-market): triggers a market order at a price—used for risk exits. Fills are certain, price is not.
- SL (stop-limit): triggers a limit order—controls price but may miss the exit in fast moves.
Improve fill quality
- Enter with limit orders near the touch; nudge a tick inside the spread if you want priority.
- Break large orders into clips; let the book refill.
- Avoid low-depth small caps unless you accept slippage as a cost of doing business.
6) A mini case study (liquid vs thin)
Instrument A (Liquid Nifty 50 stock)
- Spread: ₹0.05; 5-level depth strong on both sides.
- A ₹1 lakh market buy barely moves the price; fill ~best ask.
Instrument B (Thin small-cap)
- Spread: ₹0.40; patchy depth with air gaps.
- The same ₹1 lakh buy chews through several ask levels; average fill is much higher than the top ask—heavy slippage.
Takeaway: your instrument choice and order type matter more than most beginners expect.
7) The slippage-reduction playbook
- Prefer liquid instruments; check spread (ticks) and depth.
- Use limit orders for entries; avoid impulsive market buys in thin names.
- Size orders relative to visible depth (or average fill size); scale in.
- Avoid auctions and known news bursts unless that’s your strategy.
- For exits, choose SL-M (certainty) or SL (price control) based on risk tolerance.
8) Common mistakes (and quick fixes)
- Mistake: “Markets are quiet; I’ll just hit market.”
Fix: Use a limit at/near touch; let price come to you. - Mistake: One huge order in a thin book.
Fix: Split into tranches; watch depth replenish. - Mistake: Using SL (stop-limit) for a fast crash.
Fix: Accept SL-M for certainty in panic scenarios. - Mistake: Ignoring the spread as a real cost.
Fix: Track it; it’s part of your edge (or drag).
9) 5-minute pre-trade checklist
- □ Spread tight (just a few ticks)?
- □ Depth healthy on both sides of mid?
- □ Order size sensible vs top-of-book and 5-level depth?
- □ Entry via limit? Exit plan via SL-M/SL ready?
- □ Avoiding auctions or event spikes unless intentional?
10) Try this (paper-trade exercise)
- Pick a liquid large-cap and a thin small-cap.
- At ~10:30 AM, capture top-5 bid/ask levels (price & qty).
- Paper-trade a tiny market buy; note expected vs filled price → slippage.
- Repeat with a limit buy placed a tick inside the spread.
- Compare fills, times, and slippage. Write your rule for when you’ll use market vs limit.
11) Quick FAQ
Q: Is a tighter spread always better?
A: Usually yes, but check depth; a tight spread with thin depth can still slip.
Q: Why did my stop-limit not execute?
A: The trigger fired, but price never traded at or through your limit—common in fast moves.
Q: Can I avoid slippage completely?
A: No. You can minimize it with liquid names, smart limits, and careful sizing.
Glossary (fast refresher)
Bid/Ask: top buyer price / top seller price.
Spread: ask − bid.
Depth (L2): quantities available at each price level.
Slippage: executed − expected price (buy side).
Impact cost: price move caused by your trade.
Partial fill: only part of your order fills at the current price.
Auction: opening/closing match period.
Circuit: price bands that limit intraday movement.
Sources / further learning
NSE — First-time investor: Opening an account (brokers, process, basics).
NSE — Investor education “Getting started” hub (safe investing, charges/taxes, basics).
NSE — Equity Market Trading System (how orders work on NEAT+, book types, stop-loss, etc.).
NSE — Product/Order specs (order type, order book, attributes).
BSE — How to Buy & Sell Shares (PDF) (includes “Types of Orders,” intraday/product codes).
BSE — Basics of Equity Derivatives (PDF) (clear definitions of market/stop/other orders).
BSE — Common Booklet on Securities Market (PDF) (broad trading basics for beginners).
Stock Market 101 — Beginner’s Course by kartalks. Lesson 4.
Stock Market 101: Learn Stocks from Zero
Disclaimer
This is educational content, not investment advice. Markets involve risk. Please do your own research and consult a qualified advisor before acting.