What Is the “Market Impact Cost” and How Does It Relate to the Effective Spread?

Market impact cost is the portion of the effective spread that is directly attributable to the trade itself ▴ the cost incurred from moving the market price due to the order's size. When a large order consumes multiple levels of the order book, the price shifts, and this price change is the market impact.

The effective spread is the total cost, which includes both the market impact and the cost of the quoted spread. High market impact leads to a wider effective spread.