Abstract
We consider an agent who needs to buy (or sell) a relatively small amount of assets 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.
| Original language | English |
|---|---|
| Pages (from-to) | 326-348 |
| Number of pages | 23 |
| Journal | Stochastic Systems |
| Volume | 11 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 1 Dec 2021 |
| Externally published | Yes |
Keywords
- Adverse selection
- Ergodic properties
- Execution probabilities
- High frequency trading
- Limit order book
- Market impact
- Market microstructure
- Markov jump processes
- Optimal tactics
- Optimal trading strategies
- Queuing model
- Stochastic control
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