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Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems
Author(s) -
Harris Lawrence
Publication year - 1998
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/1468-0416.00019
Subject(s) - stylized fact , market liquidity , order (exchange) , order book , value (mathematics) , liquidity crisis , immediacy , transaction cost , trading strategy , liquidity risk , business , database transaction , limit (mathematics) , microeconomics , economics , financial economics , monetary economics , computer science , finance , macroeconomics , mathematical analysis , philosophy , programming language , mathematics , epistemology , machine learning
This study derives optimal dynamic order submission strategies for trading problems faced by three stylized traders: an uninformed liquidity trader, an informed trader and a value‐motivated trader. Separate solutions are obtained for quote‐ and order‐driven markets. The results provide practicable rules for how to trade small orders and how to manage traders. Transaction cost measurement methods based on implementation shortfall are proven to dominate other methods. Since investors demand liquidity when they submit market orders and supply liquidity when they submit limit orders, the results improve our understanding of market liquidity. In particular, the models illustrate the role of time in the search for liquidity by characterizing the demand for and supply of immediacy.