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TL;DR

The effect of a trade on the market price. Temporary impact reverses after the trade; permanent impact persists. Total market impact determines the true cost of execution.

By Valenke Exam Prep Team·Last updated 2026-06-03

Market Impact

The effect of a trade on the market price. Temporary impact reverses after the trade; permanent impact persists. Total market impact determines the true cost of execution.

Why it matters for interviews

Market impact is the primary execution cost for institutional traders. The square-root law, Almgren-Chriss model, and the tradeoff between urgency and impact are core topics in execution algorithm design.

Definition and Mathematical Foundation

The effect of a trade on the market price. Temporary impact reverses after the trade; permanent impact persists. Total market impact determines the true cost of execution.

Application in Quantitative Finance

Market impact is the primary execution cost for institutional traders. The square-root law, Almgren-Chriss model, and the tradeoff between urgency and impact are core topics in execution algorithm design.

Related Terms

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Frequently Asked Questions

What is the Almgren-Chriss model?▼
An optimal execution framework that minimizes a combination of expected execution cost (market impact) and execution risk (timing risk). The solution balances urgency against impact, yielding a deterministic trading schedule.
Why does market impact follow the square-root law?▼
The Kyle model predicts linear impact in order flow, but empirical evidence supports \( \text{impact} \propto \sigma\sqrt{Q/V} \). This can be derived from diffusive order flow models or dimensional analysis arguments.
What is the difference between temporary and permanent impact?▼
Temporary impact is the price displacement during trading that reverts afterward (due to short-term supply/demand imbalance). Permanent impact reflects new information incorporated into the price. Both matter for total execution cost.