Optimal Execution in Presence of Short-Term Trading

24 Pages Posted: 21 Mar 2014

See all articles by Adriana Criscuolo

Adriana Criscuolo

Portware LLC

Henri Waelbroeck

Baruch College MFE Lab; AlgoCortex LLC

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2014

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: market impact, fair pricing, optimal schedule, metaorders, implementation shortfall, permanent impact

JEL Classification: D4, G14, C61

Suggested Citation

Criscuolo, Adriana and Waelbroeck, Henri, Optimal Execution in Presence of Short-Term Trading (February 19, 2014). Available at SSRN: https://ssrn.com/abstract=2411748 or http://dx.doi.org/10.2139/ssrn.2411748

Adriana Criscuolo (Contact Author)

Portware LLC ( email )

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

Henri Waelbroeck

Baruch College MFE Lab ( email )

17 Lexington Avenue
New York, NY 10021
United States

AlgoCortex LLC ( email )

38A Claremont Rd
Scarsdale, NY 10583
United States

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