Glossary

Market Impact

1 min read

Market impact refers to the effect a trader has on the market when they trade an asset. Buying an asset will increase the price and selling an asset will decrease the price. Any executed trades will remove liquidity from the market. Market impact will be most noticeable for large orders and in markets with low liquidity.

Market impact will usually hurt the trader, resulting in slippage. Market impact can be mitigated by dividing an order into several smaller orders, or spreading it across multiple markets. Trading strategies such as VWAP and TWAP are often employed for orders that are expected to have significant market impact.

Related Terms
Liquidity
Liquidity is a measure of how easily an asset can be traded on financial markets. The depth of an order book is often cited as a measure of liquidity.
Learn more.
Slippage
Slippage is financial loss during trading as a result of market inefficiencies and illiquidity. Slippage occurs when an illiquid market experiences a sudden, large change in demand or supply, resulting in losses for the buyer or seller.
Learn more.
Algorithmic Trading
Algorithmic trading is financial trading that is executed by software as opposed to humans. Trading algorithms have superior speed and computational power compared to humans.
Learn more.
Explore More Terms →