Apparent impact: the hidden cost of one-shot trades

DOI10.1088/1742-5468/2015/06/P06022MaRDI QIDQ3302298zbMATH OpenOpenAlexFDO

Authors Iacopo Mastromatteo

Publication date 11 August 2020

Published in Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1409.8497

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Financial applications of other theories (91G80)

Abstract: We study the problem of the execution of a moderate size order in an illiquid market within the framework of a solvable Markovian model. We suppose that in order to avoid impact costs, a trader decides to execute her order through a unique trade, waiting for enough liquidity to accumulate at the best quote. We find that despite the absence of a proper price impact, such trader faces an execution cost arising from a non-vanishing correlation among volume at the best quotes and price changes. We characterize analytically the statistics of the execution time and its cost by mapping the problem to the simpler one of calculating a set of first-passage probabilities on a semi-infinite strip. We finally argue that price impact cannot be completely avoided by conditioning the execution of an order to a more favorable liquidity scenario.

Recommendations

• Strategic Execution Trajectories
• Optimal trade execution in illiquid markets
• Some mathematical aspects of market impact modeling
• Drift dependence of optimal trade execution strategies under transient price impact
• Dynamic optimal execution in a mixed-market-impact Hawkes price model

Cites work

• A stochastic model for order book dynamics
• Estimating the efficient price from the order flow: a Brownian Cox process approach
• Is market impact a measure of the information value of trades? Market response to liquidity vs. informed metaorders
• On the area under a continuous time Brownian motion till its first-passage time
• Price dynamics in a Markovian limit order market
• The price impact of order book events: market orders, limit orders and cancellations

Cited in

(1)

• Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

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