Temporary Market Impact

Temporary Market Impact refers to the transient price deviation caused by the execution of a trade that reverts over time. Unlike permanent impact, which changes the equilibrium price, temporary impact is caused by the market's inability to absorb a large order instantly.

As liquidity providers adjust their positions and other traders react to the imbalance, the price tends to return toward its original level. Understanding the duration and magnitude of temporary impact is crucial for traders who want to minimize the cost of execution by timing their trades to take advantage of mean reversion.

It is a key factor in optimizing execution algorithms for both crypto and traditional derivatives.