Market impact (aka price impact) is the bias induced on prices due to market activity like trading. Predictions of the price paid for an order which is large and will affect prices are estimates of market impact.
Market impact (aka price impact) is the bias induced on prices due to market activity like trading. (Note that placing orders may also bias prices though that is rarely studied.) Examples of where price impact is relevant:
- Predictions of the price paid for an order which is large and will affect prices, and
- Optimizations of a schedule of trading to balance finishing trading an order with not demanding too much liquidity from the market.
Market impact is typically seen as having temporary and permanent components (with some models also adding a decaying component. Permanent impact affects the price for all subsequent traders and is often associated with information entering the market. Therefore, discussions of prices impounding expectations imply (permanent) market impact and the tag may then be relevant. Temporary impact accounts for the fact that trading may also involve a fee which only a given trader pays; what subsequent traders pay is unaffected. Finally, decaying impact affects subsequent trades, but with waiting will disappear.
