How Efficiency Shapes Market Impact
The authors develop a theory for the market impact of large trading orders, which they call metaorders because they are typically split into small pieces and executed incrementally. Market impact is empirically observed to be a concave function of metaorder size, i.e. the impact per share of large metaorders is smaller than that of small metaorders. Within a framework in which informed traders are competitive they derive a fair pricing condition, which says that the average transaction price of the metaorder is equal to the price after trading is completed. They show that at equilibrium the distribution of trading volume adjusts to reflect information, and dictates the shape of the impact function.