What Happened to the Rest? A Principled Approach to Clean-Up Costs in Algorithmic Trading

19 Pages Posted: 4 Mar 2021

See all articles by Petter N. Kolm

Petter N. Kolm

New York University (NYU) - Courant Institute of Mathematical Sciences

Nicholas Westray

Courant Institute of Mathematical Sciences

Date Written: March 3, 2021

Abstract

This article proposes a practical and computationally efficient methodology to assign a value for clean-up cost, the opportunity cost associated with the cancelled portion of an order. Unbiased estimation of clean-up costs is an essential component in performing accurate transaction cost analysis in algorithmic trading. We illustrate with an example drawn from practice. The approach is introduced in the context of cleaning up orders in algorithmic trading. However, it is straightforward to modify it for other settings where market data needs to be properly adjusted for realized impact. This new approach will be of interest to academics and practitioners alike.

Keywords: Algorithmic trading, Backtesting, Best execution, Clean-up cost, Optimal execution, Trading, Transaction cost analysis

JEL Classification: C51, C53, C61, G10, G11, G12

Suggested Citation

Kolm, Petter N. and Westray, Nicholas, What Happened to the Rest? A Principled Approach to Clean-Up Costs in Algorithmic Trading (March 3, 2021). Available at SSRN: https://ssrn.com/abstract=3797211 or http://dx.doi.org/10.2139/ssrn.3797211

Petter N. Kolm (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States

Nicholas Westray

Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY - 10012
United States

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