Slippage Protection is a mechanism that shields a user’s positions from immediate liquidations and high-risk situations when filling orders. The goal is to prevent users from experiencing execution prices outside of their expectations. In other words, it minimizes an order’s ability to execute at increasingly detrimental prices.
Slippage protection activates when traders use Market Orders. Consider the following scenario:
When a user opens a position with a Market Order, if the order is large enough, it may have to fill across multiple ticks. This discrepancy between the trader’s expected price and the actual executed price is known as ‘slippage’. The more the order’s average entry price deviates from the trader’s desired price, the higher the slippage. Slippage can occur at any time when orders are large enough or during periods of low liquidity. Our mechanism also offers a level of protection when closing positions.
How does Slippage Protection work on Phemex?
When a trader opens a position with a Market Order, the system will actually convert this into a special type of limit order based on the order quantity. When placing a buy Market Order with a quantity below 15000, the Limit Price will be set at 3 ticks higher than the current ask price. When placing a sell Market Order, the Limit Price will be set at 3 ticks lower than the current bid price. The distance allowed increases by 1 tick for every additional 5000 contracts added to the order quantity. The maximum distance allowed is 50 ticks.
Because of the associated urgency, the protection mechanism becomes more tolerant for closing positions. When a trader closes a position with a Market Order, the system allows for more slippage.
When closing a position with a buy Market Order, the Limit Price becomes one of two alternatives. It will either be the Ask Price x 125% or the Bankrupt Price, depending on which one is the smaller of the two.
When closing a position with a sell Market Order, the Limit Price becomes the larger of the following two options: Bid Price x 75% or Bankrupt Price.
In very rare situations when there are not enough orders within the approved distance range, a trader’s Market Order may be only partially filled up to the maximum allowed price with the remaining contracts canceled and returned.
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