Market Impact
Market impact is the price movement caused by your own order. A large market order uses up the best prices and moves the market against you; the bigger the order relative to available liquidity, the larger the impact.
Market impact is how much your own order moves the price. A small order barely moves it, but a large order can use up the best prices in the book and push the price against you.
- Category
- Market Structure
- Reading time
- 3 min
- Also called
- Price impact
- Updated
Market impact in plain words
Market impact is one of several hidden trading costs, alongside the bid-ask spread, delay and orders that never fill.1
Research on US stocks finds price changes rise in a straight line with order-flow imbalance, and the effect is stronger when the order book is thin.2
That same finding leads to the well-known rule that price impact grows roughly with the square root of trade size.2
How to estimate and limit impact
Check depth
Look at size available near the price.
Compare order to depth
Thinner books move more: slope inversely proportional to the market depth.2
Expect non-linear cost
Expect impact to grow with the square root of trade size, not in proportion.2
Split the order
Trade in pieces over time.
Consider hidden venues
Consider venues that let institutions find the other side quietly, with little price impact.3
Measure afterwards
Measure it as part of implementation shortfall, along with delay and opportunity costs.1
Worked examples
Example 1 — Walking the book
≈ −35Hypothetical asks: 500 @ 10.00, 500 @ 10.02, 500 @ 10.05. Buy 1,500 at market.
| Average | 10.0233 |
| Impact vs 10.00 | ≈ 35 |
This is the market impact part of the implicit trading costs — the order paid more than the top quote.1
Example 2 — Square-root rule
≈ 2×A hypothetical order four times larger.
| Impact | ≈ 2× not 4× |
With the square-root rule, four times the size moves price about twice as much.2
Example 3 — VWAP hides it
Hidden costA trade beats VWAP but still pushed the price.
| VWAP result | Looks fine |
VWAP benchmarks often miss an order's own impact, so they can understate the true cost.1
Market impact vs slippage
| Aspect | Market impact | Slippage |
|---|---|---|
| Cause | Your own order | Any price change before fill |
| Grows with | Order size | Speed and volatility |
| Controllable | By splitting orders | Partly |
| Measured | Versus pre-trade price | Versus expected price |
Where impact matters
Execution
Part of Slippage on large trades.
Benchmarks
Versus Volume-Weighted Average Price.
Sizing
Fitting Position Sizing to Liquidity.
Order choice
Advantages and disadvantages
Advantages
- Knowing it helps size trades.
- Encourages smarter execution.
- Explains hidden trading costs.
Disadvantages
- Hard to measure exactly.
- Grows quickly with size.
- Worse in thin markets.
- Benchmarks such as VWAP can hide it.
Going deeper
Read as far as you need. Each level builds on the one before it.
Implicit cost
Beginner
Spread, impact, delay and missed fills together make up the hidden cost of trading.1
Depth
Intermediate
Order-flow imbalance moves price roughly in proportion, and more so when depth is low.2
Scaling
Advanced
From that relationship follows the square-root link between trade size and price impact.2
Common mistakes
Ignoring depth
Check the book first.
One big market order
Split large orders.
Judging only by VWAP
Compare to arrival price.
Trading thin stocks large
Impact can be huge.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Impact is the price move your order causes.
- It grows with size relative to depth.
- Larger orders follow roughly a square-root rule.
- Splitting orders reduces it.
- VWAP may understate it.
Frequently asked questions
Does impact matter for small traders?
Is impact permanent?
How do funds reduce impact?
Further learning
- Slippage
Related execution cost.
- Liquidity
Why depth matters.
- Volume-Weighted Average Price
Common benchmark.
- Order Book
Seeing depth.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CFA Institute. Trading Costs and Electronic Markets (opens in a new tab) Checked .
- arXiv (Cont, Kukanov, Stoikov). The Price Impact of Order Book Events (opens in a new tab) Checked .
- U.S. SEC. Regulation NMS Adopting Release 34-51808 (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.