Market Impact of Small Orders

TL;DR

This empirical study analyzes how small orders impact markets, revealing that impact can be linear or concave depending on the instrument, and proposes a simple model for estimating market impact based on microstructure principles.

Contribution

It introduces a straightforward, linear impact model applicable across various instruments, based on empirical analysis of order book events and microstructure reasoning.

Findings

Impact varies between linear and concave functions of volume.

Normalized impact patterns are consistent across different instruments.

Proposed model provides satisfactory estimates for different impact volume dependencies.

Abstract

The article is an empirical study of market impact through order book events. It describes a mechanism of extracting an average participation rate and a market impact of small orders which represent individual slices of large metaorders. The study is based on tick data for futures contracts. It is shown that the impact could be either linear or a concave function as a function of trading volume, depending on the instrument. After normalisation, this dependency is shown to be very similar for a wide range of instruments. A simple yet effective model for market impact estimation is proposed. This model is linear in nature and is derived based on straightforward microstructure reasoning. The estimation shows satisfactory results for both concave and linear market impact volume dependencies.