Concealing the Trading Footprint: Optimal Execution Horizon

45 Pages Posted: 8 Nov 2012 Last revised: 5 Jul 2015

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; True Positive Technologies

Date Written: November 7, 2012

Abstract

Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.

The PIN Theory (Easley et al. [1996]) reveals the Microstructure mechanism by which: Market Makers adjust their trading range to avoid being adversely selected by Informed Traders; Informed Traders reveal their future trading intentions when they alter the Order Flow; Consequently, Market Makers’ trading range is a function of the Order Flow imbalance.

The Optimal Execution Horizon (OEH) algorithm presented here takes into account order imbalance to determine the optimal participation rate.

Keywords: Liquidity, flow toxicity, broker, VWAP, market microstructure, adverse selection, probability of informed trading, VPIN, OEH

JEL Classification: C02, D52, D53, G14, G23

Suggested Citation

López de Prado, Marcos, Concealing the Trading Footprint: Optimal Execution Horizon (November 7, 2012). Available at SSRN: https://ssrn.com/abstract=2172471 or http://dx.doi.org/10.2139/ssrn.2172471

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

True Positive Technologies ( email )

NY
United States

HOME PAGE: http://www.truepositive.com

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