A strategy can lose its edge as order size grows even when its forecast remains unchanged. Trading consumes liquidity, reveals information and interacts with the rest of the market. This lesson distinguishes a mechanical book walk, an observed price response and the causal price change attributable to an order. That distinction is necessary before a desk uses an impact estimate to choose size or claim execution skill.
Learning objectives. By the end of this note you should be able to:
- separate average execution concession from posttrade price movement;
- identify the unobserved counterfactual in a causal impact claim;
- interpret linear and nonlinear cost curves with consistent units;
- design an empirical impact comparison that records confounders;
- reconcile spread, response and total cost in a cumulative case.
In this lesson
- Three meanings that should not be merged
- Temporary and persistent components
- From size to a cost curve
- Estimating without overclaiming
- Using the estimate on a desk
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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