Market impact cost

Market impact cost is a measure of market liquidity that reflects the cost faced by a trader of an index or security.[1] The market impact cost is measured in the chosen numeraire of the market, and is how much additionally a trader must pay over the initial price due to market slippage, i.e. the cost incurred because the transaction itself changed the price of the asset.[2] Market impact costs are a type of transaction costs.

Example

For a stock to qualify for possible inclusion into the Nifty, it has to have a market impact cost of below 0.75% when doing Nifty trades of half a crore rupees. The market impact cost on a trade of Rs 0.3 million of the full Nifty is about 0.05%. This means that if the Nifty is at 2000, a buy order goes through at 2001, i.e.2000 + (2000×0.0005), and a sell order gets 1999, i.e.2000  (2000×0.0005).[3]

References

  1. "What is market impact cost?". InvestorWords.com. Retrieved August 3, 2012.
  2. Nicolo Torre. "The Market Impact Model". Barra. Retrieved August 3, 2012.
  3. National Stock Exchange of India Limited


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