Market Impact: A Systematic Study of Limit Orders

Abstract

This paper is devoted to the important yet little explored subject of the market impact of limit orders. Our analysis is based on a proprietary database of metaorders -large orders that are split into smaller pieces before being sent to the market. We first address the case of aggressive limit orders and then, that of passive limit orders. In both cases, we provide empirical evidence of a power law behaviour for the temporary market impact. The relaxation of the price following the end of the metaorder is also studied, and the longterm impact is shown to stabilize at a level of approximately two-thirds of the maximum impact. Finally, a fair pricing condition during the life cycle of the metaorders is empirically validated.

Market Impact: A Systematic Study of the High Frequency Options Market

“…5). This histogram is quite similar to the one of presented for the equity aggressive metaorders in [Said et al, 2018]. On can note in Figure 6 that metaorders with very low participation rates and very high ones are evenly represented.…”

“…This approach is in line with what is presented in [Said et al, 2018], and leads to a systematic study of market impact studies.…”

“…Our analysis is based on a proprietary database of metaorders -large orders that are split into smaller pieces before being sent to the market -on one of the main Asian markets. In line with our previous work on the equity market [Said et al, 2018], we propose an algorithmic approach to identify metaorders, based on some implied volatility parameters, the at the money forward volatility and at the money forward skew. In both cases, we obtain results similar to the now well understood equity market: Square-root law, Fair Pricing Condition and Market Impact Dynamics.…”

“…Most of them are concerned with the equity markets, see e.g. [Almgren et al, 2005], [Moro et al, 2009], [Toth et al, 2011], [Bershova and Rakhlin, 2013], [Mastromatteo et al, 2014], [Bacry et al, 2015], [Gomes and Waelbroeck, 2015], [Brokmann et al, 2015] and [Said et al, 2018]. All these studies have shown a common behavior during the execution of a metaorder, namely, a concave and temporary impact followed by a convex and decreasing relaxation.…”

How Option Hedging Shapes Market Impact

“…To this end our approach is mainly inspired by the original definition of a metaorder which is nothing less than a large order split into several small orders to be executed incrementally. Besides it has been shown in two companion papers ([Said et al, 2018] and [Said et al, 2019]) that the metaorders can obey to an algorithmic definition. This implies that they are not necessarily driven by execution strategies but they are more often simply opportunistic or hedging trades.…”