Market impact and trading profile of large trading orders in stock markets

TL;DR

This paper empirically analyzes the market impact of large, incrementally executed trading orders, revealing a concave impact function and impact decay over time, based on data from Spanish and London stock markets.

Contribution

It provides the first detailed empirical characterization of the market impact and execution profile of hidden large orders across two major stock markets.

Findings

Market impact is approximately proportional to the square root of order size.

Impact decays over time following a power-law after order completion.

Hidden orders are executed at a rate similar to overall market trading.

Abstract

We empirically study the market impact of trading orders. We are specifically interested in large trading orders that are executed incrementally, which we call hidden orders. These are reconstructed based on information about market member codes using data from the Spanish Stock Market and the London Stock Exchange. We find that market impact is strongly concave, approximately increasing as the square root of order size. Furthermore, as a given order is executed, the impact grows in time according to a power-law; after the order is finished, it reverts to a level of about 0.5-0.7 of its value at its peak. We observe that hidden orders are executed at a rate that more or less matches trading in the overall market, except for small deviations at the beginning and end of the order.