Market impact is the cost you create yourself when entering or exiting the market. The larger the relative size, the higher the chance of worsening your average price.
Who this is for
- Anyone executing orders of non-trivial size.
- Anyone trading less deep instruments or thin time windows.
- Anyone who wants to separate idea edge from implementation cost.
Prerequisites — Complete silver-path first (min.: market-order, slippage, active-management, position-sizing). Foundation: bronze-path.
In plain terms — If you buy a lot and fast, you push price against yourself. That move is a real cost of your operations.
Control levers
Estimate expected impact as a function of size, volume, and book resilience. Avoid single orders that are too large relative to available depth. Use splitting, iceberg, and venue selection to distribute flow. Balance execution urgency with impact cost. Recalibrate parameters when the liquidity regime changes.
Example — Buy order equal to 12% of average hourly volume. Executed in one block it causes an average worsening of 22 bps. Split over 25 minutes impact drops to 9 bps.
Card
- Goal: minimise cost generated by your own order.
- Key inputs: relative size, depth, execution pace.
- Warning sign: systematic worsening as size grows.
- Typical mistake: optimising only for fill speed.
- Practical action: internal impact vs participation-rate model.
Gold path — Module: Professional execution. Part of gold-path.