Price impact is the change in market price caused by an order consuming available liquidity. A large order can trade through several price levels, while a small order may fill near the best bid or ask. The size of the effect depends on the market, order type, venue, and book depth.
Order Book Example
Suppose the best ask is $65,000 for 1 BTC and the next ask is $65,100 for 2 BTC. A market buy for 3 BTC would pay $65,000 for the first BTC and $65,100 for the next two, before fees and other changes. Its average fill price would be about $65,066.67. The estimated difference from the initial ask is $66.67 per BTC, or about 0.10%.
The book may change before or during execution. This example estimates the cost from a fixed snapshot; it does not guarantee the final fill.
Models and Venue Types
Order books and automated market makers use different liquidity mechanisms. An order book matches bids and asks. An automated market maker prices trades from pool reserves and a fee formula. Researchers use several models to estimate market impact, but no single equation describes all assets, venues, and market conditions.
Price impact is one part of execution cost. Slippage compares an expected or reference price with the fill price and can include impact, timing, and quote movement. See Depth of Market, Slippage, Market Order, and Order Book.