Cumulative Market Impact of Consecutive Orders Over One and Two Days: How Long Does the Market Remember Past Trades?

Abstract

In this paper, we want to address the question of market impact of consecutive orders over the same day and across two consecutive days. This question is key for traders who need to determine the best way to schedule their executions. This question is answered using a unique database of more than 260,000 trades with an amount of more than EUR250bn. Our main findings are the following: On the same day, the market impact of consecutive orders is not independent. The subsequent market impact for a given trade size is much smaller than the one of the initial order. Trading a larger order continuously or splitting this large order into two subsequent orders will lead to almost the same market impact over the same day. In other words, the market remembers earlier trades on the same day. Over two consecutive days, the market impacts are independent. The market impact on the second day and the market impact on the first day display identical results for different trades. Trading on the same day reduces the overall market impact for overall order sizes below 12% (in Average daily volume). This strong result backs the common market practice of spreading orders over two days only for larger order sizes that cannot be executed over one day. In other words, the market forgets standard trades that took place on the previous day.