medium · Market Microstructure market-impact
A trader executes 100,000 shares in a stock and observes a midprice impact of 15 basis points. Using the square-root impact model, a second trader plans to execute 200,000 shares in the same stock under identical market conditions.
What is the expected market impact for the second order?
- 15 basis points, because the stock's liquidity is a fixed characteristic independent of individual order size.
- 60 basis points, because doubling the order in a fully illiquid market causes impact to scale as the square of order size.
- 30 basis points, because the order size doubles and impact scales linearly with order size.
- 21 basis points, because impact scales with the square root of order size: 15 x sqrt(2) is approximately 21 bps.
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