Optimal Order Placement in Limit Order Markets

39 Pages Posted: 2 Oct 2012 Last revised: 23 Nov 2014

See all articles by Rama Cont

Rama Cont

University of Oxford

Arseniy Kukanov

AQR Capital Management, LLC

Date Written: May 2, 2013

Abstract

To execute a trade, participants in electronic equity markets may choose to submit limit orders or market orders across various exchanges where a stock is traded. This decision is influenced by the characteristics of the order flow and queue sizes in each limit order book, as well as the structure of transaction fees and rebates across exchanges. We propose a quantitative framework for studying this order placement problem by formulating it as a convex optimization problem. This formulation allows to study how the interplay between the state of order books, the fee structure, order flow properties and preferences of a trader determine the optimal placement decision. In the case of a single exchange, we derive an explicit solution for the optimal split between limit and market orders. For the general problem of order placement across multiple exchanges, we propose a stochastic algorithm for computing the optimal policy and study the sensitivity of the solution to various parameters using a numerical implementation of the algorithm.

Keywords: optimal order execution, market microstructure, optimal order placement, limit order market, order routing, fragmented market, stochastic approximation

JEL Classification: G11, G17

Suggested Citation

Cont, Rama and Kukanov, Arseniy, Optimal Order Placement in Limit Order Markets (May 2, 2013). Available at SSRN: https://ssrn.com/abstract=2155218 or http://dx.doi.org/10.2139/ssrn.2155218

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

Arseniy Kukanov

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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