EconPapers    
Economics at your fingertips  
 

Optimal Contracts for Delegated Order Execution

Martin Larsson, Johannes Muhle‐Karbe and Benjamin Weber

Mathematical Finance, 2025, vol. 35, issue 4, 779-795

Abstract: We determine the optimal affine contract for a client who delegates their order execution to a dealer. Existence and uniqueness are established for general linear price impact dynamics of the dealer's trades. Explicit solutions are available for the model of Obizhaeva and Wang, for example, and a simple gradient descent algorithm is applicable in general. The optimal contract allows the client to almost achieve the first‐best performance without any agency conflicts for many reasonable parameter values. Common trading arrangements arise as limiting cases. In particular, optimal contracts for many reasonable model parameters resemble the “fixing contract” common in FX markets, in that they only incorporate market prices briefly before the conclusion of the trade. Price manipulation by the dealer is avoided by only putting a sufficiently small weight on these prices, and complementing this part of the contract with a sufficiently large fixed fee.

Date: 2025
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/mafi.12462

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:35:y:2025:i:4:p:779-795

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2025-10-11
Handle: RePEc:bla:mathfi:v:35:y:2025:i:4:p:779-795