Price impact is the change in an asset’s market price caused by a specific trade. This phenomenon occurs when a large buy or sell order significantly alters the prevailing market price due to insufficient liquidity at various price levels. In markets with low liquidity, even moderately sized trades can cause substantial price movements, leading to less favorable execution prices for the trader. Understanding price impact is crucial for executing large orders efficiently and minimizing trading costs.
Context
News reports often analyze price impact in relation to market liquidity, especially when discussing the execution of large institutional trades or the performance of smaller altcoins. High price impact can deter large investors and indicate market inefficiency or susceptibility to manipulation. Decentralized finance protocols continuously work to reduce price impact through deeper liquidity pools and improved automated market maker designs.
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