Market Impacts and the Life Cycle of Investors Orders

Abstract

In this paper, we use a database of around 400,000 metaorders issued by investors and electronically traded on European markets in 2010 in order to study market impact at different scales.At the intraday scale we confirm a square root temporary impact in the daily participation, and we shed light on a duration factor in 1/T γ with γ 0.25. Including this factor in the fits reinforces the square root shape of impact. We observe a power-law for the transient impact with an exponent between 0.5 (for long metaorders) and 0.8 (for shorter ones). Moreover we show that the market does not anticipate the size of the meta-orders. The intraday decay seems to exhibit two regimes (though hard to identify precisely): a "slow" regime right after the execution of the meta-order followed by a faster one. At the daily time scale, we show price moves after a metaorder can be split between realizations of expected returns that have triggered the investing decision and an idiosynchratic impact that slowly decays to zero.Moreover we propose a class of toy models based on Hawkes processes (the Hawkes Impact Models, HIM) to illustrate our reasoning. We show how the Impulsive-HIM model, despite its simplicity, embeds appealing features like transience and decay of impact. The latter is parametrized by a parameter C having a macroscopic interpretation: the ratio of contrarian reaction (i.e. impact decay) and of the "herding" reaction (i.e. impact amplification). 1 A metaorder refers to a large investor buy or sell order which is executed as a succession of smaller orders.

Impact is not just volatility

“…A now commonly accepted result is the so-called square-root law (see e.g. [2][3][4][5][6][7][8][9][10][11][12][13]) which states that in normal trading conditions…”

A Simple Microstructural Explanation of Concave Pice Impact

“…From the above, we deduce that the process 2 , is a continuous martingale under Λ and, therefore, is given by a Brownian integral. Using the test function, as in the above, we easily deduce that d < M > t = σ 2 (X t )dt a.s. under Λ.…”

“…Within the meta-order impact, one can distinguish two sub-types, depending on whether the relative rate of the execution, or its total duration, is fixed. This paper studies the meta-order impact for a fixed execution rate (also known as the expected price trajectory).There exist various empirical studies that confirm the concavity of meta-order impact (see, e.g., [1,3,2,21,17,4]). They show that the expected price change as a function of traded volume is concave (see the left part of Figure 2), and some even claim a specific power (in particular, square-root) dependence of the impact on the volume.…”

Optimal Execution with Rough Path Signatures

“…If the volume she trades is small compared to the overall volume, this effect may be neglected. However, if the trader sends large trading orders the impact on the order book may negatively affect the price at which the order is executed (see [BILL15] and the references therein). In this section we will introduce the market impact model that will be used in this paper.…”