Market Impact

Market impact is the price movement caused by executing a trade, the cost a large buyer or seller imposes on itself by consuming liquidity. An order that lifts every offer within 1 percent of the mid price will, by definition, move the market at least 1 percent before it finishes filling.

Why it matters

Impact is the dominant hidden cost of trading at size, usually larger than any explicit fee. It is why institutions slice orders over hours or days using algorithms that track benchmarks such as VWAP, and why the largest trades happen away from public books at over-the-counter desks, where a dealer absorbs the size privately. Impact is also asymmetric with market conditions: the same order costs far more to execute in a panic than in a calm.

Measured impact per dollar traded is one of the better practical definitions of liquidity, and it varies enormously across assets and venues.

In the gold vs bitcoin debate

Gold's market absorbed central bank purchases exceeding 1,000 tonnes in both 2022 and 2023 with orderly pricing, a demonstration of depth accumulated over centuries. Bitcoin's market is younger and thinner, and flows such as the US spot ETF launches of 2024 visibly moved price. Advocates note the flip side: the same sensitivity that hurts sellers rewards early buyers when new demand arrives.