Optimal liquidity-based trading tactics

DOI10.1287/STSY.2021.0078zbMATH Open1489.91234arXiv1803.05690OpenAlexW3209289112MaRDI QIDQ5084495FDOQ5084495

Authors: Charles-Albert Lehalle, Othmane Mounjid, Mathieu Rosenbaum 

Publication date: 24 June 2022

Published in: Stochastic Systems (Search for Journal in Brave)

Abstract: We consider an agent who needs to buy (or sell) a relatively small amount of asset over some fixed short time interval. We work at the highest frequency meaning that we wish to find the optimal tactic to execute our quantity using limit orders, market orders and cancellations. To solve the agent's control problem, we build an order book model and optimize an expected utility function based on our price impact. We derive the equations satisfied by the optimal strategy and solve them numerically. Moreover, we show that our optimal tactic enables us to outperform significantly naive execution strategies.

Full work available at URL: https://arxiv.org/abs/1803.05690

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zbMATH Keywords

limit order bookergodic propertiesMarkov jump processesstochastic controladverse selectionmarket microstructuremarket impacthigh frequency tradingqueuing modeloptimal tacticsoptimal trading strategiesexecution probabilities

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10) Financial applications of other theories (91G80)

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Cited In (14)

• Optimal trading strategies with limit orders
• Optimal inventory management and order book modeling
• Learning the optimal trading strategy
• Optimal decisions in a time priority queue
• Optimal Execution: A Review
• Optimal execution in high-frequency trading with Bayesian learning
• Optimal liquidity provision
• On-line VWAP Trading Strategies
• Strategic trading in illiquid markets.
• Liquidity and Trading Dynamics
• Optimal Liquidity Trading*
• An explicit optimal strategy for flow trades at NASDAQ around its close
• Optimal dynamic basis trading
• Optimal liquidation under partial information with price impact

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