Price Impact Coefficient

The price impact coefficient measures how much a trade moves the price per unit of size. It separates the temporary effect of order flow, which reverts once the order is done, from the permanent effect that reflects new information being priced in. It is usually estimated by regressing execution prices on order size and participation rate, and it is the practical handle on how costly it is to trade size in a given name.

A high impact coefficient often reflects adverse selection: market makers, suspecting the counterparty may know something, widen spreads to protect themselves. This links the metric to Kyle's lambda, the classic measure of how strongly order flow moves price. The coefficient also depends heavily on liquidity, so the same order size produces a far larger impact in a thin stock than in a heavily traded one.