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The non-linear market impact of large trades: evidence from buy-side order flow

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  • Nataliya Bershova
  • Dmitry Rakhlin

Abstract

We perform an empirical study of a set of large institutional orders executed in the US equity market. Our results validate the hidden order arbitrage theory proposed by Farmer et al . [How efficiency shapes market impact, 2013] of the market impact of large institutional orders. We find that large trades are drawn from a distribution with tail exponent of roughly 3/2 and that market impact approximately increases as the square root of trade duration. We examine price reversion after the completion of a trade, finding that permanent impact is also a square root function of trade duration and that its ratio to the total impact observed at the last fill is roughly 2/3. Additionally, we confirm empirically that the post-trade price reverts to a level consistent with a fair pricing condition of Farmer et al . (2013). We study the relaxation dynamics of market impact and find that impact decay is a multi-regime process, approximated by a power law in the first few minutes after order completion and subsequently by exponential decay.

Suggested Citation

  • Nataliya Bershova & Dmitry Rakhlin, 2013. "The non-linear market impact of large trades: evidence from buy-side order flow," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1759-1778, November.
    • Handle: RePEc:taf:quantf:v:13:y:2013:i:11:p:1759-1778
    DOI: 10.1080/14697688.2013.861076
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    References listed on IDEAS

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    1. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Henri Waelbroeck, 2013. "How efficiency shapes market impact," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1743-1758, November.
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