What is Price Impact?
Price impact is the amount by which a single order moves an asset's market price as it consumes available orderbook liquidity. Larger orders walk deeper into the book, filling at progressively worse prices, so the executed average price drifts away from the pre-trade mid-price.
Price impact measures the price movement your own trade causes by eating through the limit orders resting in the book. A market buy first fills against the best ask, then the next-best, and so on — each level a little worse than the last. The gap between the pre-trade mid-price and your blended fill price is the price impact, usually expressed in basis points of notional.
It is driven by two things: how deep the orderbook is around the mid, and how large your order is relative to that depth. A thin book with little resting size gets walked quickly, so even a modest order suffers large impact; a deep, liquid market (BTC or ETH on a top venue) absorbs the same notional with almost none. Price impact is closely related to slippage — slippage is the realized shortfall versus your expected price, and on a market order the deterministic part of that shortfall is exactly the price impact from walking the book.
For funding-rate arbitrage this is a make-or-break cost. A delta-neutral position requires opening two legs — long on one venue, short on another — and closing both later, so you pay price impact up to four times over the trade's life. If the annualized funding edge on a pair is only a few percent, a couple of legs on thin books can erase the entire spread before the first funding payment lands. This is why a realistic backtester subtracts price impact from real orderbook depth rather than assuming fills at the mid.
The practical defense is sizing to the book. Check available depth on both legs at your intended notional, split large orders across time or venues, and favor the more liquid leg for the bulk of the position. Because impact scales super-linearly with size on thin books, halving order size can cut impact by much more than half — often the difference between a profitable carry and a losing one.
Price impact (basis points)
avgFillPrice = Σ(levelPrice × levelSizeFilled) / totalSizeFilled priceImpactBps = |avgFillPrice − midPrice| / midPrice × 10000
avgFillPrice is the size-weighted average across every orderbook level your order consumes. Round-trip impact (open + close, both legs) is roughly 4× the single-leg figure for a delta-neutral pair.
Market-buying $200k of a thin-book SOL perp
- •Mid-price: $150.00. Order: 1,333 SOL (~$200k).
- •Best ask $150.03 fills 400 SOL, $150.09 fills 500 SOL, $150.18 fills 433 SOL.
- •avgFillPrice = (150.03×400 + 150.09×500 + 150.18×433) / 1333 = $150.098
- •priceImpact = (150.098 − 150.00) / 150.00 × 10000 ≈ 6.5 bps on entry.
- •Round-trip on this one leg ≈ 13 bps; across both arb legs ≈ 26 bps — more than a full day of a 10% APR funding carry (10%/365 ≈ 2.7 bps/day).
Price impact vs. book depth (same $200k order)
| Market | Book depth near mid | Approx. entry impact |
|---|---|---|
| BTC, top venue | Very deep | < 1 bp |
| ETH, top venue | Deep | ~1–2 bps |
| Liquid alt (SOL) | Moderate | ~5–8 bps |
| Thin alt / small venue | Shallow | 20+ bps |
FAQ
What is the difference between price impact and slippage?
Price impact is the price movement your order causes by consuming orderbook depth — a deterministic function of size and liquidity. Slippage is the total realized difference between your expected and executed price, which includes price impact plus any adverse mid-price move between decision and fill.
Why does price impact matter for funding arbitrage?
A delta-neutral funding trade opens and closes two legs, so you pay impact up to four times. On thin books this round-trip cost can exceed the entire funding edge, turning a positive-APR pair into a loss. Modeling it against real depth is essential before entering.
How can I reduce price impact?
Size your order to available depth, split large fills across time or venues, use limit orders where the strategy allows, and concentrate size on the deeper leg. Because impact grows faster than linearly on thin books, cutting order size yields outsized savings.
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