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The Non-Linear Market Impact of Large Trades: Evidence from Buy-Side Order Flow

49 Pages Posted: 8 Jan 2013 Last revised: 14 Sep 2013

Nataliya Bershova

AllianceBernstein LP

Dmitry Rakhlin

AllianceBernstein LP

Date Written: July 2013

Abstract

We perform an empirical study of a set of large institutional orders executed in the U.S. equity market. Our results validate the hidden order arbitrage theory proposed by Farmer et al. (2013) of the market impact of large institutional orders. We find that large trades are drawn from a distribution with tail exponent of roughly 3/2 and that market impact approximately increases as the square root of trade duration. We examine price reversion after the completion of a trade, finding that permanent impact is also a square root function of trade duration and that its ratio to the total impact observed at the last fill is roughly 2/3. Additionally, we confirm empirically that the post-trade price reverts to a level consistent with a fair pricing condition of Farmer et al. (2013). We study the relaxation dynamics of market impact and find that impact decay is a multi-regime process, approximated by a power law in the first few minutes after order completion and subsequently by exponential decay.

Keywords: market impact, permanent impact, order size, price reversion and liquidity

JEL Classification: G10, G12, G17, G19

Suggested Citation

Bershova, Nataliya and Rakhlin, Dmitry, The Non-Linear Market Impact of Large Trades: Evidence from Buy-Side Order Flow (July 2013). Available at SSRN: https://ssrn.com/abstract=2197534 or http://dx.doi.org/10.2139/ssrn.2197534

Nataliya Bershova (Contact Author)

AllianceBernstein LP ( email )

1345 Avenue of the Americas
New York, NY 10105
United States

Dmitry Rakhlin

AllianceBernstein LP ( email )

1345 Avenue of the Americas
New York, NY 10105
United States

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