Market Impact
The adverse price movement caused by your own order consuming liquidity — buying pushes price up, selling pushes it down.
Formula
Market impact ≈ (avg fill price − pre-trade mid price) for a buy (sign reversed for a sell); often modeled as roughly proportional to √(order size / average daily volume)
Market impact is the degree to which your own trading moves the price against you. A large buy consumes the resting offers in the order book and walks the price up; a large sell walks it down. It is the dominant execution cost for institutional-size orders and a core reason trades are sliced and worked over time.
Impact has two components. Temporary impact is the immediate push from demanding liquidity, which partially reverts once your order stops trading. Permanent impact is the lasting price change the market attributes to the information your trade may signal. Impact grows with order size relative to available liquidity and average daily volume, and it widens sharply in thin or volatile names.
Managing impact is the entire point of VWAP, TWAP, iceberg, and dark-pool execution: spread the order out, hide size, and source liquidity quietly. The unavoidable tension is that reducing impact by trading slowly increases exposure to adverse price drift — the trade-off that implementation shortfall is built to measure.
Related Terms
Block Trade
A single large transaction — typically 10,000+ shares or $200,000+ in value — usually executed privately to minimize market impact.
AdvancedImplementation Shortfall
The total cost of executing a trade measured against the price when the decision was made — the gap between paper and realized performance.
AdvancedLiquidity
How easily you can enter or exit a position without moving the price. High liquidity = tight spreads, deep order books, fast fills.
BeginnerMarket Depth
The volume of open buy and sell orders at various price levels — a measure of how much size the market can absorb without large price movement.
IntermediatePayment for Order Flow (PFOF)
Compensation a broker receives for routing customer orders to a wholesaler, who fills them internally and pays the broker for the flow.
IntermediateSlippage
The difference between the expected fill price and the actual fill price. Positive slippage benefits you; negative slippage costs you.
BeginnerTWAP Order
An execution algorithm that splits an order into equal slices released at even time intervals, targeting the time-weighted average price.
AdvancedVWAP Order
An execution algorithm that slices a large order across the session to track the volume-weighted average price, minimizing footprint.
Advanced