This article describes a simple model of market microstructure which explains a concave price impact . In the proposed model , the local relationship between the order flow and the fundamental price (i.e. the local price impact) is linear,  which makes the model dynamically consistent. Nevertheless, the expected impact on midprice from a large sequence of co-directional trades is nonlinear and asymptotically concave. The main practical conclusion of the model is that, throughout a meta-order, the volumes at the best bid and ask prices change (on average) in favor of the executor. This conclusion, in turn, relies on two more concrete predictions of the model , one of which is tested using publicly available market data without the information about meta-orders .
This article provides a simple explanation of the asymptotic concavity of the price impact of a meta-order via the microstructural properties of the market. This explanation is made more precise by a model in which the local relationship between the order flow and the fundamental price (i.e. the local price impact) is linear, with a constant slope, which makes the model dynamically consistent. Nevertheless, the expected impact on midprice from a large sequence of co-directional trades is nonlinear and asymptotically concave. The main practical conclusion of the proposed explanation is that, throughout a meta-order, the volumes at the best bid and ask prices change (on average) in favor of the executor. This conclusion, in turn, relies on two more concrete predictions , one of which can be tested, at least for large-tick stocks, using publicly available market data .
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describes a simple model of market microstructure which explains a concave price impact . In the proposed model ,
provides a simple explanation of the asymptotic concavity of the price impact of a meta-order via the microstructural properties of the market. This explanation is made more precise by a model in which
A
with a constant slope,
R
model
proposed explanation
D
of the model
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is tested
can be tested, at least for large-tick stocks,
D
without the information about meta-orders