Matching in size: How market impact depends on the concentration of trading

Abstract

We show that filling an order with a large number of distinct counterparts incurs additional market impact, as opposed to filling the order with a small number of counterparts. For best execution, therefore, it may be beneficial to opportunistically fill orders with as few counterparts as possible in Large-in-scale (LIS) venues. This article introduces the concept of concentrated trading, a situation that occurs when a large fraction of buying or selling in a given time period is done by one or a few traders, for example when executing a large order. Using London Stock Exchange data, we show that concentrated trading suffers price impact in addition to impact caused by (smart) order routing. However, when matched with similarly concentrated counterparts on the other side of the market, the impact is greatly reduced. This suggests that exposing an order on LIS venues is expected to result in execution performance improvement.