Individual impact of agent actions in financial markets

TL;DR

This paper analyzes how individual financial firms' trades uniquely impact market prices, revealing significant heterogeneity that challenges the idea of universal impact models and emphasizes complex participant interactions.

Contribution

It provides the first detailed empirical analysis of individual firm impact heterogeneity in a real stock market setting, questioning universal impact assumptions.

Findings

High heterogeneity in impact functions across firms

Market response varies significantly by participant

Universal impact models are statistically incompatible

Abstract

We present an analysis of the price impact associated with trades effected by different financial firms. Using data from the Spanish Stock Market, we find a high degree of heterogeneity across different market members, both in the instantaneous impact functions and in the time-dependent market response to trades by individual members. This heterogeneity is statistically incompatible with the existence of market-wide universal impact dynamics which apply uniformly to all trades and suggests that rather, market dynamics emerge from the complex interaction of different behaviors of market participants. Several possible reasons for this are discussed, along with potential extensions one may consider to increase the range of applicability of existing models of market impact.