Can anybody tell me how market impact cost and opportunity cost are inversely related? Thanks
let’s say you want to buy 10,000 stocks. You can either buy everything now -> you might have high slippage (your purchase can push the stock price up, especially in thin, illiquid markets) -> high average price (market impact cost) but you don’t have to worry missing a big market move (opportunity cost). You can try to buy overtime hoping that you will get a better fill or lower average price (low market impact cost) but then you can miss a big move before your order gets filled completely. In other words, if a stock is at $36 now. You can either buy 10,000 for $37-38 dollars and not worry about missing a big move, or you can buy 2,000 for $36 and potentially miss a big move while you are still waiting to for your order for 8,000 stocks to get filled. does that help?
Yes that helps. Thanks Vishal
Market cost / Opportunity cost could potentially wipe out the alpha of many firms. Does anyone know what approach most firms take to prevent losing alpha due to these costs?
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