Optimal execution of limit and market orders with trade director, speed limiter, and fill uncertainty

Brian Bulthuis (), Julio Concha (), Tim Leung and Brian Ward ()
Additional contact information
Brian Bulthuis: Two Sigma Investments, New York, NY 10006, USA
Julio Concha: Two Sigma Investments, New York, NY 10006, USA
Brian Ward: #x2021;Industrial Engineering & Operations Research (IEOR) Department, Columbia University, New York, NY 10027, USA

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 02n03, 1-29

Abstract: We study the optimal execution of market and limit orders with permanent and temporary price impacts as well as uncertainty in the filling of limit orders. Our continuous-time model incorporates a trade speed limiter and a trade director to provide better control on the trading rates. We formulate a stochastic control problem to determine the optimal dynamic strategy for trade execution, with a quadratic terminal penalty to ensure complete liquidation. In addition, we identify conditions on the model parameters to ensure optimality of the controls and finiteness of the associated value functions. For comparison, we also solve the schedule-following optimal execution problem that penalizes deviations from an order schedule. Numerical results are provided to illustrate the optimal market and limit orders over time.

Keywords: Algorithmic trading; price impact; optimal execution; HJB equation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Working Paper: Optimal Execution of Limit and Market Orders with Trade Director, Speed Limiter, and Fill Uncertainty (2017)
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DOI: 10.1142/S2424786317500207

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