Price impact
How far does a trade push the price against the trader, and why does heavy trading make that worse?
In plain words
Price impact is the amount a trade moves the market itself. A buyer absorbs the lowest priced sell orders and lifts the price; a seller hits the highest priced buy orders and pushes it down. Larger orders move the price further.
Why it matters
The recorded price and the price actually paid differ. Impact is a hidden cost that grows with order size and shrinks with available liquidity, so a fill can be materially worse than the quote that tempted the trader.
In a real week: BTC, week of 11 November 2024
In the week of 11 November 2024, BTC traded 3.1 times its prior 12-week average dollar volume at 36.88 billion, and the weekly range reached 16.27% around an 11.8% gain. The largest one-hour move was -2.83% at 19:00 UTC on Wednesday, shortly after the 16:00 UTC high. Trading into such movement pays worse prices than the chart suggests.
A common mistake
Assuming the quoted price is the price received. In a fast, thinly supplied book a large order walks through levels, so the average fill lands worse than the first quote seen.