Optimal Execution in Presence of Short-Term Trading

46 Pages Posted: 3 Mar 2013 Last revised: 24 Mar 2013

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2013

Abstract

Starting from basic hypotheses on how footprints from hidden orders are interpreted by short-term traders, we derive a fair price model that predicts market impact for non-uniform participation rate schedules. We use this model to derive an optimal execution schedule for a risk-averse trader. The optimal schedule delays front-loading to avoid the information shock of an abrupt start. We also consider optimal strategies with respect to the Volume-Weighted Average Price (VWAP) benchmark. We show that the VWAP-optimized schedule for a large order is similar to the risk-averse one. In an example, we compute the cost of front-loading, and the additional cost of the information shock that results from an aggressive trade start.

Keywords: hidden order, information leakage, market impact, trading cost, optimal trade execution

JEL Classification: D41, D82, D84, G12, G14, L11, L86

Suggested Citation

Criscuolo, Adriana and Waelbroeck, Henri, Optimal Execution in Presence of Short-Term Trading (January 1, 2013). Available at SSRN: https://ssrn.com/abstract=2227139 or http://dx.doi.org/10.2139/ssrn.2227139

Adriana Criscuolo (Contact Author)

Portware LLC ( email )

233 Broadway, 24th Floor
New York, NY 10279
United States

Henri Waelbroeck

Portware LLC ( email )

233 Broadway, 24th Floor
New York, NY 10279
United States
212-370-8313 (Phone)

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

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