Define “Price Discovery” and How It Is Impacted by Large, Illiquid Market Orders

Price discovery is the process by which a market determines the equilibrium price for an asset through the interaction of buyers and sellers. Large, illiquid market orders can distort this process by causing significant, temporary price impact.

By consuming all available liquidity at multiple levels, the order forces the price to an artificial extreme, which is a form of temporary, self-inflicted slippage. This momentary distortion can lead to mispricing until arbitrageurs correct the market.