Slippage, Price Impact, Execution Risk: Why Good Forecasts Still Lose Money
Why good forecasts still lose money
Prediction markets are not just about being right. They are about being right and getting a decent fill. If your predicted probability is only a few points better than the market, execution can erase the edge.
The three execution concepts that explain most surprises are:
• slippage
Slippage: your fill is worse than you expected
Slippage is the gap between the price you expected and the price you actually get. In prediction markets, slippage is common because order books can be thin and quotes can move quickly.
Common causes:
• low liquidity at the top of book
• large order size relative to depth
• fast price moves or news
• market orders that consume multiple levels
Price impact: you move the market against yourself
Price impact is the part of slippage caused by your own trade. When you buy a lot of YES, you remove asks and the best ask moves up. When you sell a lot, you remove bids and the best bid moves down.
Impact is not a moral failure. It is a liquidity fact. If you trade large relative to the book, you pay impact.
Execution risk: uncertainty about what will happen when you try to trade
Execution risk is the uncertainty around execution quality and completion:
• will you fill at all?
• will you fill partially?
• will the price run away while you wait?
• will you be forced to cross the spread at a worse time?
Execution risk tends to spike when markets are thin, near deadlines, and around news.
Liquidity is the root driver
All three concepts get worse when liquidity is weak:
• wider bid ask spread
• lower order book depth
• more gaps between price levels
That is why a market can look tradable at 10 contracts and untradable at 1,000.
Market orders: the fastest way to overpay
A market order prioritizes speed. It will execute at the best available prices until your size is filled.
In thin markets, market orders are expensive because:
• you cross the spread immediately
• you often walk the book and pay impact
• you lose control of worst case price
Limit orders: more control, different risk
A limit order caps the worst price you accept. This can reduce slippage and impact, but it introduces a different problem: you may not fill.
How slippage turns edge into negative EV
Small edges are fragile. If your average fill moves a few points, your expected value can flip negative. Always compute break even probability using executable prices and realistic fills.
A practical slippage estimate (before you trade)
• Open the order book and locate your intended size.
• Estimate your average fill if you consume multiple levels.
• Recompute implied probability from that average fill.
• Compare to your predicted probability and check break even after fees.
How to reduce slippage and impact
• Reduce size
• Prefer limit orders when timing is not critical
• Split orders
• Avoid peak uncertainty windows
• Use Liquidity Checklist before entering
Measure execution after the fact
Track execution quality with effective spread and realized spread. See Effective Spread and Realized Spread.
Takeaway
Slippage and price impact are normal in thin markets. Treat execution as part of forecasting: choose liquid markets, size to depth, and use order types that control worst case price.