Gaps and Slippage: How Volatility Affects Execution?

As introduced in the Trading Essentials module's lesson on holding period and overnight exposure, a price gap occurs when the price at the opening of a session differs from the price at the close of the previous session, often because significant news occurred while the market was inaccessible. Gaps are, in essence, a visible manifestation of volatility that occurred outside of active, continuous trading.

As introduced in the Understanding Trading Costs unit, slippage refers to the difference between an expected and actual trade execution price, and it tends to occur more frequently during periods of high volatility or low liquidity. Slippage is, similarly, a direct practical consequence of volatility affecting trade execution in real time.

Both gaps and slippage share a common root cause: rapid price movement that outpaces the ability of the market (or a specific trade) to execute at a continuous, expected price. Gaps occur across periods when the market is closed or inaccessible, while slippage occurs during active trading, but both reflect volatility's practical effect on execution.