Price Impact

Price impact is the difference between the estimated price and the market price of trade due to differences in trade size. It is used to define the correlation between the change in price and the incoming price of the asset in a particular trade.

The price of a given asset is pushed higher by the buy trades. This is done by exhausting the sell orders that are the cheapest in the order book. The exact opposite happens in sell trades. The liquidity of the trading pair has a key role to play in the extent to which these price moves get affected. The more the liquidity, the lesser the impact visible.

Trading firms conduct extensive research to control as well as monitor the price impact on a particular asset. A lot of studies are being undertaken to understand the dependency of trade impact on the trade size and how long it usually takes the price of the asset to get manifested completely.

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