Definition
Market impact is the price movement caused by executing a trade. Large orders can move prices against the trader, especially in less liquid securities. Institutional investors use algorithms, dark pools, and order-splitting to minimize market impact. It's a hidden cost of trading beyond commissions and spreads.
Formula
Example
A large buy order pushes the stock from $50 to $50.50 during execution. The $0.50 increase is market impact cost.
FAQ
What is Market Impact?
The effect of a trade on a security's price.
How do you calculate Market Impact?
A common formula for Market Impact is: Market Impact = Execution Price - Arrival Price (before order)
Why is Market Impact important?
Market Impact helps investors evaluate trading mechanics and make more informed decisions.
Related Terms
Liquidity
The ease with which an asset can be bought or sold without significantly affecting its price.
Slippage
The difference between expected and actual execution price of a trade.
Dark Pool
A private exchange where institutional investors trade large blocks anonymously.
Algorithmic Trading
Using computer programs to automatically execute trading strategies.