Market impact cost

Market impact cost

Market impact cost is a measure of market liquidity that reflects the cost faced by a trader of an index.

Definition

Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time.

Impact cost is a practical and realistic measure of market liquidity; it is closer to the true cost of execution faced by a trader in comparison to the bid-ask spread.

For a stock to qualify for possible inclusion into the Nifty, it has to have a market impact cost of below 0.75% when doing Nifty trades of half a crore rupees. The market impact cost on a trade of Rs 0.3 million of the full Nifty is about 0.05%. This means that if the Nifty is at 2000, a buy order goes through at 2001, i.e.2000+(2000*0.0005), and a sell order gets 1999, i.e.2000-(2000*0.0005).

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