Concealing the Trading Footprint: Optimal Execution Horizon
45 Pages Posted: 8 Nov 2012 Last revised: 5 Jul 2015
Date Written: November 7, 2012
Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.
The PIN Theory (Easley et al. ) 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: Suggested Citation