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Apparent impact: the hidden cost of one-shot trades

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  • Iacopo Mastromatteo

Abstract

We study the problem of the execution of a moderate size order in an illiquid market within the framework of a solvable Markovian model. We suppose that in order to avoid impact costs, a trader decides to execute her order through a unique trade, waiting for enough liquidity to accumulate at the best quote. We find that despite the absence of a proper price impact, such trader faces an execution cost arising from a non-vanishing correlation among volume at the best quotes and price changes. We characterize analytically the statistics of the execution time and its cost by mapping the problem to the simpler one of calculating a set of first-passage probabilities on a semi-infinite strip. We finally argue that price impact cannot be completely avoided by conditioning the execution of an order to a more favorable liquidity scenario.

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  • Iacopo Mastromatteo, 2014. "Apparent impact: the hidden cost of one-shot trades," Papers 1409.8497, arXiv.org, revised Jun 2015.
    • Handle: RePEc:arx:papers:1409.8497
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    References listed on IDEAS

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    1. Damian Eduardo Taranto & Giacomo Bormetti & Fabrizio Lillo, 2014. "The adaptive nature of liquidity taking in limit order books," Papers 1403.0842, arXiv.org, revised Apr 2014.
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    Cited by:

    1. Hai-Chuan Xu & Zhi-Qiang Jiang & Wei-Xing Zhou, 2016. "Immediate price impact of a stock and its warrant: Power-law or logarithmic model?," Papers 1611.04091, arXiv.org.

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