Market impact cost

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

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[edit]

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[edit]

  1. ^ "What is market impact cost?". InvestorWords.com. Retrieved August 3, 2012. 
  2. ^ Nicolo Torre. "The Market Impact Model". Barra. Archived from the original on October 8, 2012. Retrieved August 3, 2012. 
  3. ^ National Stock Exchange of India Limited