Open AccessOptimal Liquidity-Based Trading Tactics
Author(s) -
CharlesAlbert Lehalle,
Othmane Mounjid,
Mathieu Rosenbaum
Publication year - 2021
Publication title -
stochastic systems
Language(s) - English
Resource type - Journals
ISSN - 1946-5238
DOI - 10.1287/stsy.2021.0078
Subject(s) - market liquidity , computer science , limit (mathematics) , order (exchange) , interval (graph theory) , function (biology) , mathematical optimization , trading strategy , control (management) , market impact , operations research , econometrics , economics , mathematics , finance , market microstructure , artificial intelligence , mathematical analysis , combinatorics , evolutionary biology , biology
We consider an agent who needs to buy (or sell) a relatively small amount of assets over some fixed short time interval. We work at the highest frequency meaning that we wish to find the optimal tactic to execute our quantity using limit orders, market orders, and cancellations. To solve the agent’s control problem, we build an order book model and optimize an expected utility function based on our price impact. We derive the equations satisfied by the optimal strategy and solve them numerically. Moreover, we show that our optimal tactic enables us to outperform significantly naive execution strategies.