Thesestudies,whiletheyestablishapriceimpact,alsosuffer
fromanotherselectionbias,insofarastheylookonlyatactual
executions.Thetruecostofmarketimpactarisesfromthose
tradesthatwouldhavebeendoneintheabsenceofamarket
impactbutwerenotbecauseoftheperceptionthattheprice
impactcost wouldbe large. Inone offew studiesof how
largethiscostcouldbe,ThomasLoebcollectedbidandask
pricesfromspecialistsandmarketmakersatapointintime
for a variety of block sizes. Thus, the differences in the
spreads as the block size increases can be viewed as an
expected price impact from these trades. Table 14.1
summarizeshisfindings acrossstocks,classifiedbymarket
capitalization.
TABLE14.1Round-TripTransactionsCostsasaFunctionof
Market Capitalization and Block Size
The sectors refer to market capitalization, and show the
negativerelationship between sizeand price impact.Note,
however, the effect of increasing block sizes on expected
price impact within each sector; larger trades elicit much
larger price impact than do smaller trades.