Market Impact: A Systematic Study of Limit Orders

TL;DR

This study empirically analyzes the market impact of limit orders, revealing power law behaviors and long-term impact stabilization, with implications for fair pricing during metaorder execution.

Contribution

It provides a systematic empirical analysis of limit order market impact, including aggressive and passive orders, and validates a fair pricing condition.

Findings

Market impact follows a power law behavior.

Long-term impact stabilizes at about two-thirds of maximum impact.

Fair pricing condition during metaorder lifecycle is empirically validated.

Abstract

This paper is devoted to the important yet little explored subject of the market impact of limit orders. Our analysis is based on a proprietary database of metaorders - large orders that are split into smaller pieces before being sent to the market. We first address the case of aggressive limit orders and then, that of passive limit orders. In both cases, we provide empirical evidence of a power law behaviour for the temporary market impact. The relaxation of the price following the end of the metaorder is also studied, and the long-term impact is shown to stabilize at a level of approximately two-thirds of the maximum impact. Finally, a fair pricing condition during the life cycle of the metaorders is empirically validated.