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Price impact

Reading depth

Each view includes the earlier layers; the complete engineer or auditor page is shown by default.

Price impact is the change in a venue's quoted or marginal price caused by the trade itself relative to the venue's available depth.

Opposed arrows category cue

Price impact is the price movement caused by the trade itself as it consumes available liquidity.

Why it exists

Section titled “Why it exists”

A venue cannot normally execute an unlimited order at its best visible price. Larger orders consume more posted quantity or move farther along a pricing curve, so their average execution price worsens. Impact expresses trade size relative to venue depth.

Traditional-finance analogy

Section titled “Traditional-finance analogy”

Market impact is the direct analogy. In a deterministic AMM, a quote can often be calculated from public pre-trade state. In an order book, auction, or solver system, impact depends on orders, competition, route splitting, and execution strategy. Public state can also change before settlement.

Spot, marginal, and average prices across state changes

Section titled “Spot, marginal, and average prices across state changes”

For one chosen price direction:

priceImpactFraction
= (averageExecutionPrice - preTradeReferencePrice)
  / preTradeReferencePrice

The fraction is unitless. Fees must either be included in both quantities or shown separately. A sign that means “worse” for a buyer can mean “better” for a seller, so calculations and labels must state direction.

Constant-product intuition

Section titled “Constant-product intuition”

In a zero-fee constant-product pool, x × y = k. Removing output reduces one reserve while adding input increases the other. The reserve ratio therefore moves throughout the trade, and the average execution price differs from the starting ratio. More depth produces less movement for the same trade size.

Concentrated liquidity adds a crucial boundary: visible token balances are not the same as active depth at every price. Crossing ticks or leaving ranges can change impact discontinuously.

Step-by-step price-impact calculation

Section titled “Step-by-step price-impact calculation”
  1. Declare the trade direction, exact-input or exact-output mode, and the pre-trade reference price.
  2. Read the venue’s executable pre-trade state, including active depth, fees, ranges, and reserve units.
  3. Quote the complete trade while updating marginal state across every consumed price level or curve segment.
  4. Compute the average execution price from total input and output in one consistent direction.
  5. Compare that average with the declared pre-trade reference to obtain a signed or cost-positive impact measure.
  6. Report fees, gas, market movement, and ordering effects separately unless the stated convention intentionally includes them.

Flows and loss allocation

Section titled “Flows and loss allocation”

Capital flow is the trader’s input and output and the pool or maker’s opposing inventory change. Claim flow usually does not change for a spot trade, but an order, refund, or LP position can remain under the venue’s settlement model. Information flow is the pre-trade state and selected route. Return flow is absent from price impact itself; a later arbitrage or strategy gain has a separate counterparty and cost ledger. Risk flow reaches the trader through worse execution; the venue’s maker or LP takes the changed inventory, which may later gain or lose as external prices move.

Price impact is not a return source. An arbitrageur may profit when restoring a venue to an external price, but the executable transfer comes from the venue’s counterparty or pool inventory relative to the chosen benchmark and must cover fees, gas, financing, and competition. The initiating trader bears the worse execution relative to the pre-trade reference; the maker or liquidity provider bears the opposing inventory change and its subsequent market risk.

Engineer or auditor lens

Section titled “Engineer or auditor lens”

Test price direction, decimals, reserve freshness, fee placement, rounding, route splitting, exact-input/output modes, zero liquidity, tick crossings, inactive ranges, maximum sizes, and manipulated pre-trade state. Dependent protocols need robust oracle design rather than an instantaneous manipulable quote.

Uniswap’s cross-version mechanics show how trade size relative to active liquidity moves one AMM family’s price. Its v2 pricing page shows one reserve-based implementation; other mechanisms require their own model. Both references were reviewed 2026-08-10.

Common misunderstandings

Section titled “Common misunderstandings”
  • “Price impact and slippage are synonyms.” Impact isolates the order’s effect; slippage compares reference and settlement more broadly.
  • “Pool TVL is market depth.” Asset value outside active ranges or at distant prices may not support the trade.
  • “The post-trade price is what every unit received.” The trade receives an average across changing marginal prices.

Continue with arbitrage to see how venues realign.

Machine-readable model

Key equations

Canonical expressions come from the structured concept record. KaTeX renders the notation, while the plain-text expression and variable table keep its meaning and units inspectable without JavaScript. Read the narrative above for the model's domain, assumptions, and rounding rules.

  1. Equation 1

    Plain-text equation: priceImpactFraction = (averageExecutionPrice - preTradeReferencePrice) / preTradeReferencePrice

Assurance contract

Security properties

These structured statements define desired behavior. Their stable IDs can bind tests, invariants, specifications, audit findings, or proof results without turning descriptive review advice into an assurance claim.

Desired · not evaluated: No test, audit, or proof result is implied until scoped evidence is linked to this property.

  1. SP-01Desired · not evaluated

    Impact calculations state the pre-trade reference, price direction, route, units, and fee treatment

  2. SP-02Desired · not evaluated

    Quotes use the same reserve, range, order, and fee state that settlement will enforce or expose staleness

  3. SP-03Desired · not evaluated

    Minimum-output or maximum-input bounds limit harmful execution when the venue state changes

  4. SP-04Desired · not evaluated

    Dependent protocols do not treat a manipulable instantaneous quote as an unqualified fair price

Knowledge check

Quiz

Answer in your own words, then open the model answer.

What problem does Price impact exist to address?

Model answer

Price impact explains why a larger order generally receives a worse average price when it consumes orders or moves along a market-making curve.