Temporary Impact Decay
Quick Reference
| Property | Value |
|---|---|
| Dimension | execution |
| Category | order_flow |
| Version | v0.9.0 (Beta) |
| Output Column | impact_decay_rate |
Temporary impact decay rate - measures how fast non-informational price dislocation is absorbed by liquidity providers
Formula
linear_regression_slope((post_trade_price - mid_price), window)
CDM Inputs
| Column | CDM Table | Description |
|---|---|---|
post_trade_price | cdm_* | CDM source table |
mid_price | cdm_* | CDM source table |
Parameters
| Parameter | Type | Default | Description |
|---|---|---|---|
window | integer [5, 500] | 50 | Window for decay slope estimation |
Output
Column: impact_decay_rate
Speed of price reversion after execution (higher = faster decay)
Market Intuition & Trading Rationale
Temporary impact decay measures how fast the price dislocation from an aggressive trade reverts: the slope of post_trade_price - mid_price over a rolling window. When a large buy order pushes the price above the mid, uninformed liquidity providers step in to sell at the artificially elevated price, pushing it back toward equilibrium. The speed of this reversion is the decay rate.
Fast decay (steep negative slope) means the market has ample reactive liquidity — providers quickly absorb dislocations. This is healthy market microstructure: trades cause temporary price moves that revert, and market makers earn the spread without bearing lasting inventory risk. Slow decay (flat slope) means the dislocation persists — either the trade contained information the market is slowly incorporating, or liquidity providers are absent and the book is slow to replenish.
Decay rate varies with volatility regime. During calm periods, decay is fast — dislocations are quickly arbitraged away. During stressed periods, decay slows — providers are risk-constrained and reluctant to step in front of potential informed flow. A sudden drop in decay rate is a leading indicator of liquidity stress.
Usage Cases
- Execution algo timing: After your order executes, monitor the decay rate. Fast decay means the price impact was temporary and you can resume trading immediately. Slow decay means your trade may have been informationally significant — wait for further reversion before continuing.
- Liquidity quality assessment: Fast decay = deep reactive liquidity (good venue). Slow decay = thin reactive liquidity or informed flow dominance. Use decay rate to rank venues for execution quality — prefer venues where your trades' impact decays quickly.
- Adverse selection detection: If decay rate is persistently slow across many trades, the market likely has elevated adverse selection — trades contain information that prevents reversion. Pair with
realized_spreadfor confirmation. - Microstructure regime classification: Fast decay (low impact persistence) favors market-making strategies. Slow decay (high impact persistence) favors directional strategies — price moves from large trades are more likely to continue than revert.
YAML Definition
name: temporary_impact_decay
description: Temporary impact decay rate - measures how fast non-informational price
dislocation is absorbed by liquidity providers
category: order_flow
version: v0.9.0 (Beta)
dimension: execution
status: Pre-release
required_inputs:
- post_trade_price
- mid_price
output_column: impact_decay_rate
output_description: Speed of price reversion after execution (higher = faster decay)
parameters:
window:
type: integer
description: Window for decay slope estimation
required: false
default: 50
constraints:
min: 5
max: 500
formula: linear_regression_slope((post_trade_price - mid_price), window)