Mitigating Impact Costs

Apart from bid-ask spreads being part of the implicit (hidden) transaction costs in (crypto)currency trading, traders should also consider so-called impact costs. This term refers to the impact that a buy or sell order has on the market price. The bigger the order, the more like it is to cause an adverse price movement. The previous happens when only a limited amount of Bitcoins can be sold or bought at the best bid and ask prices. Depending on the order type it will continue to execute against the second best available price in the order book and so forth, until the order is either completed or reaches its limit.

asks

If liquidity is thin, this slippage might already occur on an order size of just a single Bitcoin or less. The costs of this phenomenon equal the difference between the financial price and the original best bid or ask price. It can easily be mitigated by creating a limit order with the limit price close to the best bid or ask price, but with the additional risk that the order might not be executed (completely).

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Comments (2)

  1. Rita orlowski May 9, 2022
  2. Rita orlowski May 9, 2022