How Large Trades Move Prices and Why Order Book Depth Is Limited
Summary
The document asks how much a very large order might move an asset’s price, using a hypothetical purchase or sale of 500 million in a liquid forex market during the American session. It highlights execution speed as a possible influence and questions whether displayed order-book depth alone can predict the price change, since orders can appear and disappear and prices may quickly retrace.
The replies point readers toward Kyle’s Lambda as an introductory market-impact model, a paper by Yogo and Koijen on asset pricing with endogenous price impact, and an equities cost-impact paper. These are references rather than a worked calculation: the document gives no estimate of a pip move, model specification, data, or empirical results. Its main lesson is that impact depends on the asset and trading context, and a static snapshot of book depth may not capture how liquidity responds during execution. The cited material may require substantial background and may not transfer directly across markets.
Key ideas
- Market impact depends on the asset and trading conditions.
- A large order’s execution speed may affect its price impact.
- Displayed order-book depth is only a snapshot of changing liquidity.
- Kyle’s Lambda and the cited research are suggested starting points for studying impact.
- The document provides references, not a numerical estimate or validated trading rule.
Tags
Full text
# Impact of big order on price # Impact of big order on price What is known about the question: If someone buys or sells a huge amount of some asset how the price would change ? Of course, it depends on the kind of assets and other context. My main interest is liquid forex market like EURUSD. Say someone buy or sell 500 million - how many pips the price would change ? (Time of deal - American session - most liquid time). Does it matter the speed of execution ? Any way I would be happy to get any kind of advice on any kind of market not only forex - and any kind of info - theoretical or practical. I know the simple way to estimate - we need to consider the order book and just calculate the depth which will cover 500 Million. However it seems this method is too naive - since order book is a kind of alive - due to HFT guys new orders appear and disappear. So it may happen that the price changes and then returns to initial value in seconds. ## Answer by phdstudent (score 1) https://quant.stackexchange.com/a/19083 This is probably a nice paper you should refer to: Yogo, Koijen (2015) (link). They estimate an asset pricing model which endogenizes the price impact of large trades. It is a quite hard paper to grasp, so probably you do not want to start here, but is still one of the main references. ## Answer by nbbo2 (score 1) https://quant.stackexchange.com/a/19086 To start with the simplest model maybe you could start by googling "Kyle's Lambda" and proceed from there. ## Answer by siegel (score 1) https://quant.stackexchange.com/a/19087 You might find something useful here: Is there a standard model for market impact? And Here's a decent paper about the cost impact on equities: http://www.cims.nyu.edu/~almgren/papers/costestim.pdf I would have added this as a comment but I don't have enough reputation
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.