Market Impact

Market impact refers to the price movement caused by executing a trade. Large orders can push prices against the trader, reducing realized returns. Impact increases with trade size relative to market liquidity and during volatile periods. Even systematic strategies with modest position sizes must account for impact when managing turnover. Quant frameworks mitigate market impact by limiting trade size, spreading execution over time, and prioritizing liquid securities. Market impact modeling estimates how prices respond to trading activity, helping optimizers balance signal strength against execution cost. Ignoring market impact leads to overstated performance and unstable live results. Proper modeling ensures strategies scale responsibly. Market impact is the invisible tax of trading.