What is market impact cost?

In finance, market impact cost refers to the expense of trading a security or index. Market impact costs are a type of transaction cost and can be measured in the chosen numeraire of the market.

Where have you heard about market impact cost?

Market impact costs are typically used and considered by large financial institutions when determining the viability of a security purchase. You may have also heard market impact cost being referred to as price impact cost.

What you need to know about market impact cost.

Market impact costs can affect the market liquidity of a security issue or an exchange-traded fund (ETF). Market impact costs for ETFs incorporate information of the bid-ask spread by measuring market price volatility around the true portfolio value. Market impact costs consists of both temporary and permanent components with the temporary reflecting the price concession needed to attract counterparties at the time of order execution and the permanent reflecting information transmitted to the market by the buy/sell imbalance. Market impact cost can be summarised as: temporary component + permanent component.

Find out more about market impact cost.

Understand market impact cost further by reading our definition of market impact.