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What is market impact?

Market impact

In finance, market impact refers to the effect on a market caused by an asset being either bought or sold. The term is closely linked to market liquidity with 'liquidity' and 'market impact' often being synonymous.

Where have you heard about market impact?

Market impact is an important consideration whenever large investors consider moving money about. An example would be an investor noticing another investor placing a limit order to sell a large amount of stock and deciding to short sell their shares as a result.

What you need to know about market impact.

Market impact sees the price moving upwards when an asset is bought and downwards when an asset is sold. When large amounts of money are being moved, then market impact must be assessed along with other transaction costs. When transaction costs are low, it may cause financial intermediaries to profit from price movements that are deemed too small to be of relevance to other investors. Market impact can be measured several ways with the most simple and common being Kyle's Lambda, named after Pete Kyle's paper on market microstructure.

Find out more about market impact.

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

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