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It is well known that most fund managers do not outperform the “market.” This is mainly due to transaction costs, particularly the cost of market impact.
In every market, the quoted price is associated with a (stable) volume of buy and sell orders known as liquidity. Every time you want to buy or sell a stock, you disrupt the stability of this liquidity (either by increasing or decreasing it). You will then face market resistance, which manifests as an additional cost. This additional cost is proportional to the quantity of shares traded.
The liquidity of a stock (or an asset) is the ability to buy or sell it without causing an unfavorable price movement. The market impact of a given set of trades is the amount of liquidity that this transaction will require…[…]
an article written by…
Lamine TRAORE
Senior Quantitative Banking Risk Consultant (Quant Practice) at Quanteam
