1. What is Impact Cost?

Impact Cost measures the percentage difference between the executed price of a trade and the mid price (average of bid and ask prices). It represents the trading slippage or the cost incurred due to market impact when 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
• \( \text{Mid Price} \) — Average of bid and ask prices at the time of trade

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 trading strategies, and assess the efficiency of trade execution. Lower impact costs indicate better execution quality.

4. Using the Calculator

Tips: Enter both executed price and mid price in the same currency units. Ensure values are positive and mid price is not zero. 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. Generally, impact costs below 0.1% are considered excellent for liquid securities, while costs above 0.5% may indicate poor execution or illiquid markets.

Q2: How does market liquidity affect impact cost?
A: Higher liquidity typically leads to lower impact costs as there's less price movement needed to fill orders. Illiquid markets have higher impact costs.

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 the mid price when executing a trade.

Q4: Can impact cost be negative?
A: Yes, for sell orders where the executed price is below the mid price, impact cost will be negative, which is favorable for the seller.

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