Impact cost is a measure of market impact: the extra amount a buyer pays, or a seller gives up, when executing an order of a stated size, compared with the ideal price at that moment. The term is used mainly on the Indian stock exchanges, where it is the standard yardstick of a share's liquidity. The main entry explains why orders move prices and how the effect is modelled.
The ideal price is the mid price, the average of the best bid and best offer. Suppose the best bid is 99 and the best offer 101, so the ideal price is 100. A buyer of 1,500 shares gets 1,000 at 101 and 500 at 102, an average of 101.33. The impact cost of that order is 1.33 percent. It combines half of the bid-ask spread with the cost of reaching deeper into the book.
Impact cost is always quoted for a specific order size, since it rises as the order grows relative to order book depth. Indian index providers use it as an eligibility test, admitting only shares that can be traded in a set basket size at low impact cost. It is closely related to slippage.