Apparent impact: the hidden cost of one-shot trades

DOI10.1088/1742-5468/2015/06/P06022zbMATH Open1456.91136arXiv1409.8497OpenAlexW2962862891MaRDI QIDQ3302298FDOQ3302298

Authors: Iacopo Mastromatteo 

Publication date: 11 August 2020

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

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.

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

Recommendations

• Strategic Execution Trajectories
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Mathematics Subject Classification ID

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

Cites Work

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

Cited In (1)

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

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