Market Impact
Market Microstructure glossary · Market Impact & Execution Algorithms
Definition
The price change caused by a trade. Includes temporary impact (which reverts) and permanent impact (which persists).
Market Impact in plain English
Market impact is the simple fact that the very act of trading tends to push the price against you: big buying nudges the price up, big selling nudges it down. Imagine buying every bottle of water at a shop — you clear out the cheap ones first, so each new bottle costs more, and your own shopping is what drove the price up. Part of this move is temporary (once you stop, the price drifts back down, because it was just a short-term supply crunch) and part is permanent (the price stays higher because your huge order signaled to everyone that the thing is genuinely more wanted). Traders care because impact is a hidden cost — trade too fast or too big and you pay more than the price you first saw.
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