Price Impact
Price impact is the price movement caused by your own trade. It increases with order size and decreases with depth and liquidity.
Definition
Price impact is the change in market price caused by executing your order. It is the market response to your trade size relative to available liquidity.
Why it happens
When you trade more size than is available near the top of book, you consume multiple price levels. This moves the market and raises your average execution price.
Why it matters
Price impact is a major contributor to slippage and to higher effective spread. It is especially important in prediction markets because prices are bounded and small moves matter.
Common pitfalls
Ignoring size: The same strategy can be profitable at small size and unprofitable at larger size due to impact.
Confusing impact with information: A price move after your trade might be your own impact, not the market agreeing with your view.