1. What is Impact Cost?

Impact Cost measures the percentage difference between the executed price of a trade and the mid-market price. It quantifies the market impact or slippage cost of executing a trade.

2. How Does the Calculator Work?

The calculator uses the Impact Cost formula:

Where:

• \( \text{Executed Price} \) — Actual price at which the trade was executed (dollars)
• \( \text{Mid Price} \) — Mid-market price at the time of execution (dollars)

Explanation: A positive impact cost indicates the trade was executed above the mid-price (buy order), while a negative impact cost indicates execution below the mid-price (sell order).

3. Importance of Impact Cost Calculation

Details: Impact Cost is crucial for traders and investors to measure transaction costs, optimize execution strategies, and evaluate trading performance. Lower impact costs indicate better execution quality.

4. Using the Calculator

Tips: Enter both executed price and mid price in dollars. Ensure both values are positive numbers. The result shows the impact cost as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good impact cost?
A: Lower impact costs are better. Typically, impact costs below 0.1% are considered excellent for liquid markets, while costs above 0.5% may indicate poor execution or illiquid markets.

Q2: How does trade size affect impact cost?
A: Larger trade sizes generally result in higher impact costs due to market depth limitations and increased market impact.

Q3: What's the difference between impact cost and spread?
A: Spread is the difference between bid and ask prices, while impact cost measures the deviation from mid-price when executing a trade.

Q4: Can impact cost be negative?
A: Yes, negative impact cost occurs when sell orders are executed above mid-price or buy orders below mid-price, which is rare but possible in volatile markets.

Q5: How can I reduce impact costs?
A: Use limit orders, trade during high liquidity periods, break large orders into smaller chunks, and use algorithmic trading strategies.