Kyle's Lambda: When the Market Is Illiquid

Kyle's Lambda measures the price impact per unit of order flow — essentially, how much the price moves for each dollar of net buying or selling. It's named after Albert Kyle, whose 1985 paper on informed trading introduced the concept.

High Lambda means the market is illiquid: even small orders move the price significantly. Low Lambda means deep liquidity: large orders can execute without much slippage.

For traders, Lambda is critical for position sizing. In a high-Lambda environment, your market orders will have more slippage, your stops may get hunted, and liquidation cascades are more likely.

Lambda tends to spike before major moves — as market makers widen spreads and pull liquidity in anticipation of volatility. A rising Lambda combined with rising VPIN is one of the strongest "get out" signals.