What is 'Impact Cost' || Omnath Dubey

In financial markets, 'Impact Cost' is a measure of the cost incurred by a market participant when executing a large trade that may have an impact on the market price. It is the cost of executing a trade that arises due to the prevailing liquidity conditions in the market.

Impact cost is calculated as the difference between the execution price of a trade and the average of the best bid and ask prices at the time of execution, divided by the average of the best bid and ask prices. It is expressed as a percentage of the average of the best bid and ask prices.

A higher impact cost indicates lower liquidity and a greater impact of the trade on the market price. It is particularly relevant for large institutional investors who trade in large quantities and need to ensure that the execution of their trades does not move the market against them.

The impact cost is an important consideration for investors while placing trades, as it can affect the profitability of their trades. They may need to adjust their trading strategies or timing of trades to minimize the impact cost and ensure efficient execution of trades.