Price Impact Explained: When Your Own Trade Moves the Market
What price impact is
Price impact is the change in price caused by your own order. If your order is large relative to available liquidity, you can move the market and pay worse prices.
In prediction markets, impact is common because many markets have thin order books and limited market depth.
Impact vs slippage
Traders often call everything slippage, but it helps to separate concepts:
• Slippage is the gap between the price you expected and the price you got. It includes timing, queue, and fast quote changes.
• Price impact is the part of that gap that is directly caused by your own size consuming the book and moving price.
In practice, both can appear together. Impact is a structural cost. It does not go away with better luck.
Why impact happens in an order book
An order book is a stack of price levels. If you want to trade more than the quantity available at the best price, you must execute at worse prices deeper in the book.
That worse execution price is not random. It is mechanical.
A simple way to think about it
Impact depends on two things:
• Your order size
• The available depth near the top of book
If your size is small relative to depth, impact is small. If your size is large relative to depth, impact becomes the dominant cost.
Worked example
Order book on the ask side:
• 52c for 20 contracts
• 53c for 50 contracts
• 54c for 100 contracts
You submit a buy for 80 contracts.
Likely fills:
• 20 at 52c
• 50 at 53c
• 10 at 54c
Your true execution price is the VWAP across fills. This is impact showing up as a worse VWAP.
How impact shows up in your metrics
Impact often appears as:
• Higher effective spread than the quoted spread
• Worse VWAP as size increases
• More partial fills and longer time to complete the order
How to reduce price impact
Reduce size relative to depth
The cleanest solution is to trade smaller. Size should be chosen relative to top of book and nearby depth.
Split orders
Break a large order into smaller orders. This can reduce immediate impact, but it may increase time risk and fill uncertainty. Measure the result.
Use limit orders strategically
Limit orders can cap worst-case price. A limit that rests can also avoid crossing the spread immediately. The tradeoff is fill risk.
Avoid unstable liquidity windows
Impact is worse when liquidity is thin and spreads are widening, such as near news or near expiration.
Common mistakes
Blaming impact on bad execution: if size is too big for the book, impact is inevitable.
Using market orders by default: market orders maximize impact when depth is thin.
Ignoring exits: impact can be worse on exit, which drives round trip cost.
Takeaway
Price impact is the hidden tax of trading size in thin markets. If you want consistent results in prediction markets, you must size for depth, measure VWAP and effective spread, and treat liquidity as a hard constraint.
Related
• Depth at Best Bid and Ask: The Most Misunderstood Number
• Slippage in Thin Markets: Causes and How to Reduce It
• VWAP