Immediate Market Impact

Quick Reference

Property	Value
Dimension	execution
Category	order_flow
Version	v0.9.0 (Beta)
Output Column	immediate_impact

Immediate market impact coefficient: mid_price_change / order_size - price elasticity of liquidity at execution

Formula

mid_price_change / (order_size + epsilon)

CDM Inputs

Column	CDM Table	Description
order_size	cdm_*	CDM source table
mid_price_change	cdm_*	CDM source table

Parameters

Parameter	Type	Default	Description
epsilon	float [0.0, 1.0]	1e-10	Small constant to prevent division by zero

Output

Column: immediate_impact

Price change per unit of aggressive order flow

Market Intuition & Trading Rationale

Immediate market impact measures the price elasticity of liquidity: mid_price_change / (order_size + ε). It answers: how much does the mid-price move per unit of aggressive order flow? A high impact coefficient means the market is thin — even moderate orders push prices. A low coefficient means the market is deep — large orders can be absorbed with minimal price movement.

This is a direct measure of Kyle's lambda (the price impact parameter from Kyle's 1985 microstructure model). In the Kyle framework, lambda captures the information content of order flow — the permanent price change per unit of net order flow. Higher lambda means the market believes order flow is more informed, so prices adjust more aggressively.

Impact is not constant: it rises during stress (liquidity providers widen spreads and reduce depth), falls during quiet periods, and exhibits intraday seasonality (elevated at open/close, depressed mid-day). It also varies with trade size — small trades have disproportionately lower impact (they fit inside the touch), while large trades have disproportionately higher impact (they walk the book).

Usage Cases

• Execution algo calibration: Use immediate_impact as the cost coefficient in an optimal execution schedule. When lambda is high, slow down — spread orders over time to minimize impact. When lambda is low, execute faster — urgency is cheap.
• Liquidity stress detection: Spikes in immediate_impact signal that the market can no longer absorb orders without significant price movement. Pair with liquidity_stress_index to confirm — when both spike, defer all non-urgent execution.
• Venue selection: Compare immediate_impact across venues for the same instrument. Route to venues with systematically lower impact coefficients. Differences persist because of varying market maker participation and fee structures.
• Adverse selection proxy: Rising immediate_impact often precedes informed trading. When market makers detect informed flow, they widen spreads and reduce depth, increasing lambda. Use as an early-warning signal for toxic order flow.

YAML Definition

name: immediate_market_impact
description: 'Immediate market impact coefficient: mid_price_change / order_size -
  price elasticity of liquidity at execution'
category: order_flow
version: v0.9.0 (Beta)
dimension: execution
status: Pre-release
required_inputs:
- order_size
- mid_price_change
output_column: immediate_impact
output_description: Price change per unit of aggressive order flow
parameters:
  epsilon:
    type: float
    description: Small constant to prevent division by zero
    required: false
    default: 1.0e-10
    constraints:
      min: 0.0
      max: 1.0
formula: mid_price_change / (order_size + epsilon)