When trading, one of the biggest things to watch out for is liquidity at the quoted buy and sell prices. Liquidity is all about how smoothly you can get in and out of a position at the price shown without having to dive deeper into the orderbook to find the next best price.

If the volume offered by a market maker or liquidity provider isn't enough, you'll end up with slippage—getting a worse price than expected. This means you're paying a wider spread. Hence it is important for the liquidity and volumes at the top of the orderbook to be liquid enough to handle your trade size.

Top-of-orderbook(or simply top-of-book) liquidity provides the highest bid (buy order) and lowest ask (sell order) in an orderbook of a broker. A healthy top of book liquidity enables traders execute trades with minimal slippage and tighter spreads. Oftentimes, traders see their orders filled at a different price from the quoted price which leads to paying a wider spread on such trade.

Most traders might not notice these small differences right away, but slippage can add up over time. This lack of orderbook understanding can really eat into your gains and shake your trust in your broker.

How slippage can affect your portfolio over time

Consider a scenario where a trader sees the current price of ETH at $3444.78 and decides to place a market order to buy 10 ETH. The orderbook is as seen below;

Given the illustrated table above, say you want to sell 10 ETH, your order should be executed at the quoted price. Right?

That only happens when the volume is right and liquidity is sufficient, albeit, at the top of the orderbook. On “other DEXs”, your order will be filled at the next best price point – 3,444.5 in this case,(instead of 3,444.3) given the insufficient volume of only 5 ETH at the top of book. On Orderly-powered DEXs, with volumes at 30 ETH, your order is actually executed at 3444.79, and with even more precision – given the extra decimal points. The extra decimal places allows for more precise pricing, offering tighter quotes than other DEXs.

In essence, on other DEXs, only a part of your order (5.5847 ETH) gets filled at the top of the orderbook in this scenario, with the rest (4.4153 ETH) filled at the second layer of the book with the associated spread applied (0.6).

While this may be considered a negligible difference, it can add up over a large number of trades, affecting your overall portfolio return. Think about this slippage creeping into your profits over 100 trades.

The Orderly Difference

Although the price and bid-offer spread will change, and liquidity will differ with each trade, we can observe how these factors evolve from a cost perspective over time by expanding on the parameters in this example.

Consider trades executed at 3,444.5 with a 0.001% spread on Orderly against 3,445.5 with a 0.006% spread.

As seen above, while this graph might be a stretch, the cost effect on your portfolio over a number of trades becomes non-negligible, thus affecting your overall PnL in the long run. Orderly-powered DEXs continually enjoy deep liquidity with tighter spreads and precise execution fostered by our robust infrastructure for perps trading.

In essence, we have not only become one of the biggest sources of liquidity in DeFi but also the best place to trade perps in Web3.

Trade on an Orderly-powered DEX today