Calculating Capacity

Discussion in 'Order Execution' started by bootize, Jun 12, 2007.

  1. bootize


    Hello Everyone,

    Does anyone have insight as to how to calculate market capacity and effect on price?

    For example:

    1.) Stock XYZ trades an average of $10 million dollars in volume on any given day. ($10/share * 1 million shares traded)

    2.) I buy $1 million dollars worth of XYZ.

    How much would I affect the price? Is there a basic rule or formula to estimate this?

    Thanks! :)
  2. Never. It's pure supply/demand. If there is a seller who will sell you 100,000 shares at a given price, and you accumulate your entire position, then you didn't affect the price at all. Now, maybe if you hadn't bought those million shares, that seller's unwillingness to budge would have driven the stock's price down, but that's very hard to measure. Sometimes buying 100 shares will run the stock 20 cents on yourself, if there are no sellers in the near vicinity; sometimes, if a stock is in a range, and has a big seller whom you can accumulate from, your effect on the price will be negligible.
  3. I think it's impossible to actually calculate market impact, for the same reasons stated above. You would need to know the counterparties intent before you send your order, which can't be predicted in advance.

    One method that I tried is continuously sending orders to buy 1 share at the bid and sell 1 share at the ask, then measuring the time it takes to fill (match) at each level on the book. For example, if the market is about to fall, MMs delay short orders by several minutes, vs instantaneous execution if it's about to rise. The only problem with this method is that it costs a fortune and thus defeats the purpose of minimizing slippage...
  4. You mean You will buy 1mil on top of 10mil to move the price. B/c 10mil can go both ways...
  5. bootize


    Yeah... True indeed. I'm just trying to figure out a very general rule as to figure the point I start to "become the market itself." I know many funds close themselves to new investment because they become too big to maneuver the way they need to in their chosen markets.

    It's a tuffy!
  6. onelot


    google "market impact" papers. there will be more than you can read. the "algo trading" you hear about today is the result of the extensive research into market impact and how to reduce it. in a nutshell, it pays to break up your orders.
  7. Its sure does VWAP for the win!!
  8. js11222


    We are talking about liquidity - which can not be defined one hundred percent linearly - among other characteristics has seasonality. It may also depend on trader mix.
  9. t1ck3r


    If by chance your trading a stock that is in an index or structured product, liquidity can come flying from a un-exhaustible supply. For example RIG (Transocean inc) is 10% of the OIH if it started to move one way or the other it brings the rest of the holdings with it as an arbitrage opportunity.

    Happy Trading,

    #10     Jun 25, 2007