Universal Short-Term Trade Impact and Its Decay

Summary

The document compares the short-term price impact of one asset manager’s trades with the impact of trades from the rest of the market. It uses a linear propagator model to examine both impact magnitude and how impact changes over time. The analysis finds no significant difference between the two groups, suggesting similar impact behavior in anonymous electronic markets. This supports using propagators calibrated on anonymous market data when designing execution policies, though the evidence comes from a single asset manager’s proprietary trading data.

The study also describes how other participants’ order flow changes after a trade. Copycat trading initially adds to the impact over very short horizons, but the induced flow soon reverses and contributes to impact decay. The document offers empirical evidence about impact dynamics and their relevance to execution, without specifying markets, sample size, or broader validation across assets and trading venues.

Key ideas

• A linear propagator model finds no significant difference in short-term impact between one asset manager and the rest of the market.
• Trade impact magnitude and its time dependence appear similar in anonymous electronic markets.
• Other participants initially follow a trade, reinforcing its short-term price impact.
• The induced order flow quickly reverses and contributes to impact decay.
• The findings support anonymous-data propagators for execution design, but draw on one manager’s proprietary dataset.

Tags

# The short-term price impact of trades is universal


# The short-term price impact of trades is universal









We analyze a proprietary dataset of trades by a single asset manager, comparing their price impact with that of the trades of the rest of the market. In the context of a linear propagator model we find no significant difference between the two, suggesting that both the magnitude and time dependence of impact are universal in anonymous, electronic markets. This result is important as optimal execution policies often rely on propagators calibrated on anonymous data. We also find evidence that in the wake of a trade the order flow of other market participants first adds further copy-cat trades enhancing price impact on very short time scales. The induced order flow then quickly inverts, thereby contributing to impact decay.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.