Optimal Execution of Limit and Market Orders with Trade Director, Speed Limiter, and Fill Uncertainty
International Journal of Financial Engineering, Vol. 4, issue 2, p.1750020, 2017
28 Pages Posted: 5 Apr 2016 Last revised: 28 Feb 2019
Date Written: April 12, 2017
We study the optimal execution of market and limit orders with permanent and temporary price impacts as well as uncertainty in the filling of limit orders. Our continuous-time model incorporates a trade speed limiter and a trader director to provide better control on the trading rates. We formulate a stochastic control problem to determine the optimal dynamic strategy for trade execution, with a quadratic terminal penalty to ensure complete liquidation. In addition, we identify conditions on the model parameters to ensure optimality of the controls and finiteness of the associated value functions. For comparison, we also solve the schedule-following optimal execution problem that penalizes deviations from an order schedule. Numerical results are provided to illustrate the optimal market and limit orders over time.
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