Estimating Market Impact from Order Book and Trade Data
Summary
The question defines market impact for a market order as the price difference between the first and last shares executed. It observes that, if the order book were static, the visible sell-side depth would indicate the last price reached by a buy order. The uncertainty is that book liquidity can change while the order is being routed and executed.
The response offers a separate empirical view based on tick-by-tick trades: plot cumulative traded notional against price and use the slope over a chosen interval as an impact or liquidity measure. A steep relationship indicates that relatively little traded value coincides with a larger price move; a flatter one suggests greater capacity to absorb flow. This is a rough diagnostic, not a complete estimator for a particular order. It does not specify how to separate the order’s own impact from other market movements, account for hidden or replenishing liquidity, or incorporate latency and execution details. The document therefore illustrates why visible depth alone may not capture realized market impact.
Key ideas
- A static order book can suggest the terminal price of a market order consuming visible liquidity.
- Order book changes during routing and execution make realized impact uncertain.
- Cumulative traded notional plotted against price can provide a rough measure of liquidity and price response.
- The proposed slope method does not isolate an order’s causal impact or account for all execution dynamics.
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# Computing market impact from the order book? # Computing market impact from the order book? Market impact as I understand it measure the difference in price between the first share that is bought and the last share that is bought when an buy order of N shares is submitted to the exchange. (Maybe there are other definitions but let's just take that one). If we take that definition, it seems to me that market impact is a very predictable quantity for market orders. All we have to do is look at the limit orders in the order book and figure out what is the last sell limit order that is going to get matched with our market buy order. The only uncertainty in this calculation comes from the fact that the order book could have changed during the time it takes for our market order to make it to the top of the queue. Am I missing something? Are there other phenomena that could be happening that I'm not taking into account? It's likely the case because otherwise I don't see why market impact is notoriously hard to estimate. I'm asking this question for market orders. I understand that for limit orders, things can be more complicated because the limit order can sit for a long time in the order book before being matched. ## Answer by Beppe (score 1) https://quant.stackexchange.com/a/71333 If you have a tick by tick series you can plot cumulative Price*Volume on X axis and prices on Y axis in a XY scatter plot. Then you can derive market impact from the steepness of the resulting line in any arbitrary interval. In other words, if the same amount of money traded (say 100000$) changes prices much, liquidity is scarce and prices moves quickly, but if prices changes slowly, liquidity in the book is abundand, enough to absorb market orders.
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