Market impact

What is market impact

Market impact is the change in price caused by your own order, because buying uses up sellers' offers and selling uses up buyers' bids.

In plain terms, a buy order lifts the price and a sell order pushes it down while it executes. The larger the order compared with the liquidity available, the bigger the effect. Liquidity is the volume other traders are willing to trade near the current price.

A worked example (hypothetical)

Suppose a stock is quoted with a best offer, meaning the lowest price a seller is asking, and only a limited quantity is available at that price. A trader sends a market buy order larger than that quantity.

• The order first fills the whole quantity at the best offer.
• The remainder moves to the next, higher offer in the order book, then to the one above it.
• The trader's average fill price ends up above the price shown on screen before the order.
• After the trade, the best offer is now higher, because the cheaper offers are gone.

The gap between the price before the order and the average fill price is the market impact cost. If the trader later sells the position, the same effect works in the opposite direction. To see what a price difference means in money for a given position size, use the tools on the Calculators page.

Formal definition and measurement

Professionals usually measure market impact against a benchmark price, most often the mid-price at the moment the decision to trade was made (the "arrival price"). Impact is the signed difference between the average execution price and that benchmark, adjusted for the direction of the trade. It is usually quoted in basis points.

Two parts are separated:

• Temporary impact: the extra price paid to get liquidity quickly. It fades after the order ends.
• Permanent impact: the part of the move that stays, because the market reads the order as new information.

Empirical studies often find impact grows roughly with the square root of order size relative to traded volume, not in a straight line. This is why large orders are split into smaller pieces over time, often through algorithmic or API trading.

Edge cases

• Impact vs slippage. Slippage is any difference between the expected and actual fill price. Market impact is the part caused by your own order. Slippage can also come from a fast market even when your order is tiny.
• Thin markets. Off-hours, news releases, a flash crash or low free float shares make impact larger.
• Information leakage. If others detect a large order, front running can add to the impact.
• Dealer quotes and CFDs. When a dealer quotes the price, a small retail order may not reach the underlying market at all. See A-book and B-book.
• Partial fills. Limit orders avoid paying through the book but may only be partly filled. See Fill and partial fill and Fill or kill and IOC.

Where you see the term

• Execution quality and transaction cost reports from brokers and funds.
• News about block trades, index rebalancing and opening and closing auctions.
• Platform order-book or depth-of-market windows, which show how far an order could move the price.

Leveraged CFD and forex trading can lose money fast, and execution costs such as impact and slippage add to that risk. See Risk management.

Related terms

Contract size · Average daily range · Circuit breaker · Counterparty · Trading glossary

Frequent questions

What does market impact mean in simple words?

It means your own order moves the price against you while it is being filled.

Does a small retail order have market impact?

Usually very little in liquid markets, but it can matter in thin markets or around news.

Is market impact the same as slippage?

No. Slippage is the total difference from the expected price. Market impact is only the part your own order causes.

How do large traders reduce the price impact of large orders?

They often split orders over time, use limit orders or trade in auctions. These methods reduce impact but bring other risks, such as the order not being fully filled.