AT2 Price Impact

An illiquid stock is bought under a time limit. Large orders move the price.

Objective

Buy 5,000 ILQ close to the arrival price, the price when the order began. Shares left unfilled at the close are penalised at 5%.

What it shows

• Price impact: the order is large against the book, so buying moves the price.
• The trade-off between buying quickly and buying cheaply.
• A penalty that makes not finishing worse than paying more.

Watch out for

• Sweeping the book and paying for depth that is not there.
• Waiting for the price to come back, and running out of time.
• Other students buying the same stock, so the price runs against each.

Who takes part

• Agency Trader — every student. Buys 5,000 ILQ, a stock with little depth.
• Computer traders — market makers and noise traders, few and thin.

Class size

Any size, from one student. With more than ten working at once in an illiquid stock, the price moves for everyone, which is the point.