Market impact
The move in price caused by one's own trading as an order uses up the available liquidity. Often the largest cost of a big order, and invisible in the commission.
Where you will meet it
Market impact appears in 12 learning outcomes on the CFA syllabus. A few of them:
- Contrast equity trading on an exchange, off an exchange and over the counter
“The trade-off is transparency against market impact: the more volume leaves displayed markets, the more fragmented liquidity becomes and the less information the public price contains.”
- Show a deep grasp of CFA Institute's Code and Standards by using them to resolve particular cases
“Manipulation turns on intent: spreading false rumours to move a price, or trading to fake activity or push a closing price, breaches Standard II(B), while breaking a large order into pieces to limit market impact is a legitimate strategy.”
- Explain why an index portfolio can drift from its benchmark and how that tracking error is kept in check
“Sources include fees and commissions, cash drag from dividends and inflows not yet invested, index reconstitutions and corporate actions that force trades, sampling or optimisation that falls short of full replication, and market impact when trading illiquid names.”
- Explain how portfolio size, cash flow needs, horizon, and regulatory and other limits constrain asset allocation
“Size cuts both ways: large investors gain access to private assets, better terms and internal staff, but face capacity limits in small markets and market impact when trading; small investors may be unable to meet minimums or diversify across private funds.”
See also
Practise it
Practise market impact until it is automatic: questions that explain every wrong option.
Take the free diagnostic →