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Square-root law of market impact

The square-root law says the price impact of an order scales with the square root of its size relative to daily volume. It is the standard rule for estimating what a large order will cost in impact.

The formula in words

Impact ≈ a constant × volatility × √(order size ÷ daily volume). The √ means impact grows slower than size, but it never stops growing — there is no free large order.

What it implies for execution

Because impact is sub-linear, splitting a big order into smaller pieces across venues and over time lowers the total paid. The law is why size, not just venue, drives execution cost.

How EnsoTrade measures it

EnsoTrade prices a large order against live order books across venues — which venues to use, what size each piece should be, and whether to rest an order or cross the spread. It is independent measurement, not execution: your own desk or execution partner keeps placing the orders on its own accounts, and we never touch custody, keys or funds. Before a window we price it at your real clip size on the venues you can use; after a window we score the fill with full workings. We quote no price or saving until you give your real clip size and fee stack — then the number is yours to check.

FAQ

Why square root and not linear?
Empirically, impact grows with the square root of size across most liquid markets — larger orders are absorbed partly by liquidity that refreshes, so cost per unit rises slower than size.
How do you use the square-root law in practice?
To estimate, before trading, how much a given clip will move the price, and to decide how far to split it across venues and time so the total impact is minimised.

Related

Implementation shortfallArrival priceVWAPTWAPParticipation rateMarket impactMaker vs taker feesThe scoreboard

Independent execution measurement

Price an order before you trade and score the fill after, on live multi-venue order books. We never touch custody, keys or orders — the independence is the point.

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