Hello, I'd like to ask about what single order size would obviously create market impact. For example, if a future trades 200 contracts per minute on average during a certain period of time. how many contracts can I order each time without affecting the market? Is the upper limit of this ratio 20% or 50%? Would anyone with market making experience be willing to share their insights? thank you.
To quote your girlfriend, you are not that big..... kidding aside you are not going to affect any moderately liquid market.
I am not talking if I can affect market liquidity. I am just thinking about how to estimate a strategy capacity from the liquidity perspective.
If you don't want to affect the market, then the correct order size is *zero*. If you don't want to SIGNIFICANTLY affect the market, then less than 1% of volume so 2 contracts in this example, is what I've seen in most academic studies. Rob
Hi, If the average volume is 200 contracts per minute, placing orders around 10–20% of that (so 20–40 contracts) is usually safe to avoid obvious market impact. Going above 50% per order would likely move the market unless liquidity is very deep. From a market-making perspective, staying under 20% per slice is a good rule of thumb. Hope that helps!
it is useful to estimate strategy capacity. for example, my strategy requires position close in 1 minutes, if 20 contracts (10% of 200) will avoid obvious market impact, then my strategy performance will not be affected within the fund size of 20 contracts. Choosing market order or limited order depends on the market situation.