A Residual Supply Curve represents the portion of total market supply available to a specific buyer or group of buyers after accounting for the demand from all other market participants. It illustrates how much additional quantity a buyer can acquire at different price points without affecting the broader market equilibrium, thereby indicating their potential market impact.
Mechanism
The mechanism for constructing a residual supply curve involves subtracting the supply curve of all other buyers from the aggregate market supply curve. This analytical construct reveals the price elasticity of supply faced by a single large participant. It effectively quantifies the liquidity available to that specific entity and the price sensitivity of that liquidity.
Methodology
The methodology’s strategic utility lies in informing optimal trading strategies for institutional participants, especially those operating with large order sizes in markets like crypto. By understanding their residual supply curve, traders can estimate the market impact of their orders, optimize execution algorithms to minimize slippage, and assess the true cost of acquiring a position. This analytical framework is crucial for smart order routing and block trading.
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