Optimal execution with stochastic delay

Álvaro Cartea () and Leandro Sánchez-Betancourt ()
Additional contact information
Álvaro Cartea: University of Oxford
Leandro Sánchez-Betancourt: King’s College London

Finance and Stochastics, 2023, vol. 27, issue 1, No 1, 47 pages

Abstract: Abstract We show how traders use marketable limit orders (MLOs) to liquidate a position over a trading window when there is latency in the marketplace. MLOs are liquidity-taking orders that specify a price limit and are for immediate execution only; however, if the price limit of the MLO precludes it from being filled, the exchange cancels the order. We frame our model as an impulse control problem with stochastic latency where the trader controls the times and the price limits of the MLOs sent to the exchange. We show that impatient liquidity takers submit MLOs that may walk the book (capped by the limit price) to increase the probability of filling the trades. On the other hand, patient liquidity takers use speculative MLOs that are only filled if there has been an advantageous move in prices over the latency period. Patient traders who are fast do not use their speed to hit the quotes they observe, or to finish the execution programme early; they use speed to complete the execution programme with as many speculative MLOs as possible. We use foreign exchange data to implement the random-latency-optimal strategy and to compare it with four benchmarks. For patient traders, the random-latency-optimal strategy outperforms the benchmarks by an amount that is greater than the transaction costs paid by liquidity takers in foreign exchange markets. Around news announcements, the value of the outperformance is between two and ten times the value of the transaction costs. The superiority of the strategy is due to both the speculative MLOs that are filled and the price protection of the MLOs.

Keywords: Algorithmic trading; High-frequency trading; Stochastic delay; Latency; 93E20; 91G80; 49L20; 49L25 (search for similar items in EconPapers)
JEL-codes: C02 C61 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-022-00491-w Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:finsto:v:27:y:2023:i:1:d:10.1007_s00780-022-00491-w

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-022-00491-w

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().