Is Market Impact a Measure of the Information Value of Trades? Market Response to Liquidity vs. Informed Trades

46 Pages Posted: 10 Jul 2013 Last revised: 20 Mar 2014

See all articles by Henri Waelbroeck

Henri Waelbroeck

Baruch College MFE Lab; AlgoCortex LLC

Carla Gomes

Portware LLC

Date Written: July 9, 2013


We examine information, market impact and trade sizes using a data-set of institutional trades where approximately 1/4 of the orders are labeled as having been created for cash flow purposes. We find that during the execution the functional form and scale of market impact are similar for cash flows as for other trades. After the trade is completed, the impact of cash flows reverts almost completely on average in two to five days. For trades excluding cash flows price reversion is only a fraction of total impact: for every size, the price after reversion is, on average, equal to the average execution price, leaving no immediate profits after accounting for trading costs. Observed mark-to-market profits on merged orders from multiple portfolio managers and Nasdaq-listed stocks suggest that these trades are more informed than the average. Mark-to-market losses on cash flows, trades that follow momentum and additions to a prior position seeking to take advantage of an improved price reveal the low information content of these trades. The complete price reversion for uninformed trades suggests that prices cannot be manipulated as assumed in no-quasi-arbitrage arguments for the linearity of permanent impact. There is no permanent impact, only information that causes trades.

Keywords: implementation shortfall, market impact, sunshine trading, fair price, market efficiency, market microstructure, active fund management, permanent impact

JEL Classification: D41, G12, G14

Suggested Citation

Waelbroeck, Henri and Gomes, Carla, Is Market Impact a Measure of the Information Value of Trades? Market Response to Liquidity vs. Informed Trades (July 9, 2013). Available at SSRN: or

Henri Waelbroeck (Contact Author)

Baruch College MFE Lab ( email )

17 Lexington Avenue
New York, NY 10021
United States

AlgoCortex LLC ( email )

38A Claremont Rd
Scarsdale, NY 10583
United States

Carla Gomes

Portware LLC ( email )

233 Broadway, 24th Floor
New York, NY 10279
United States

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