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Order book liquidity and slippage explained
An order book shows current buy and sell interest for a trading pair. The best displayed bid and ask are useful, but they do not show the whole picture. Real execution depends on how much volume is available at each level.
Slippage happens when the final execution price is worse than expected. In thin markets, even a moderate order can consume several levels of the order book and change the average price of the trade.
For arbitrage research, this means that spread size must be compared with market depth. A 1% spread is not necessarily useful if there is only a small amount available at the quoted price.
A better signal should estimate the average fill price for the intended trade size. This makes the analysis more realistic and helps reduce false positives.