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Market Impact

Market impact refers to the effect that a large trade or series of trades can have on the price of a security or asset. Large trades can drive up or push down the price of an asset due to changes in supply and demand. Market impact is a key consideration for institutional investors and traders executing large orders, as the impact can increase transaction costs and affect profitability. Minimizing market impact often involves breaking up large orders into smaller trades.

Example

A hedge fund places a large buy order for a stock, causing the price to rise as demand increases, reflecting the market impact of the trade.

Key points

• Refers to the effect that large trades have on the price of a security or asset.

• Large trades can push prices up or down due to changes in supply and demand.

• A key concern for institutional investors and traders executing large orders.

Quick Answers to Curious Questions

Market impact is the effect that large trades have on the price of a security or asset, typically driving prices up or down.

Traders can minimize market impact by breaking up large orders into smaller trades or using algorithmic trading strategies.

Large trades can affect prices and increase transaction costs, so minimizing market impact is crucial for maintaining profitability.

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