Permanent Impact Ratio
Quick Reference
| Property | Value |
|---|---|
| Dimension | execution |
| Category | order_flow |
| Version | v0.9.0 (Beta) |
| Output Column | permanent_ratio |
Permanent impact ratio: long_term_price_change / immediate_impact - proportion of impact reflecting true information incorporation
Formula
long_term_price_change / (immediate_impact + epsilon)
CDM Inputs
| Column | CDM Table | Description |
|---|---|---|
immediate_impact | cdm_* | CDM source table |
long_term_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: permanent_ratio
Ratio of permanent to immediate market impact (0-1)
Market Intuition & Trading Rationale
Permanent impact ratio decomposes a trade's total price impact into its permanent and temporary components: long_term_price_change / immediate_impact. Total impact = permanent (information) + temporary (liquidity). This ratio tells you what fraction of the initial price move sticks after the liquidity effect dissipates.
A ratio near 0 means the trade had almost entirely temporary impact — the price snapped back. The trade was uninformed, driven by liquidity demand, and market makers profited. A ratio near 1 means the trade had almost entirely permanent impact — the price moved and stayed there. The trade was informed, the new price level reflects genuine information incorporation, and market makers lost to adverse selection.
This is arguably the most important execution quality metric because it separates what you paid for liquidity from what you paid for being right. An execution algo that minimizes temporary impact is good. An execution algo that minimizes permanent impact is impossible — permanent impact is the market correctly repricing to reflect the information in your order.
Usage Cases
- Order informativeness assessment: Monitor permanent_impact_ratio for your own orders. High ratio means your orders are moving the market permanently — you're trading with information the market hasn't yet incorporated. Reduce aggression to minimize information leakage.
- Market maker risk management: Rising permanent_impact_ratio across the market means informed trading is increasing. Market makers should widen spreads to compensate for higher adverse selection risk — the fraction of the spread they get to keep (realized_spread) is shrinking.
- Alpha signal validation: If your alpha signal predicts direction and your executions consistently show high permanent_impact_ratio in the predicted direction, your signal captures genuine information — the market is repricing to reflect what you already knew.
- Venue toxicity scoring: Venues with systematically higher permanent_impact_ratio host more informed flow. Route passive (market-making) strategies to low-ratio venues. Route aggressive (directional) strategies wherever execution cost is lowest — the information content of your trade is independent of venue.
YAML Definition
name: permanent_impact_ratio
description: 'Permanent impact ratio: long_term_price_change / immediate_impact -
proportion of impact reflecting true information incorporation'
category: order_flow
version: v0.9.0 (Beta)
dimension: execution
status: Pre-release
required_inputs:
- immediate_impact
- long_term_price_change
output_column: permanent_ratio
output_description: Ratio of permanent to immediate market impact (0-1)
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: long_term_price_change / (immediate_impact + epsilon)