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Balancing Market Impact and Timing Risk in Optimal Execution

Article arXiv papers · Author: David Marcos
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Summary

The document presents a formal framework for choosing how to execute orders in securities markets. Its utility function balances market impact against timing risk, with timing risk represented through the transaction costs associated with execution. This framing connects execution choices to the trade-off between the cost of moving the market and the cost of waiting or completing an order over time.

The approach builds on established optimal-trading theory while incorporating features intended to support distinct execution strategies. It also considers alternative market-impact models and different statistical distributions of returns. The excerpt does not specify the utility function's precise form, the strategies it produces, or quantitative results, so it offers a high-level framework rather than enough detail to assess performance or implementation.

Key ideas

  • Optimal execution is framed as a balance between market impact and timing risk.
  • The utility function treats execution-related transaction costs as a component of timing risk.
  • The framework extends existing theory to accommodate distinctive execution strategies.
  • The analysis considers multiple impact models and return distributions, but the excerpt gives no comparative results.

Tags

ExecutionMarket microstructureRisk management
Full text
# Transaction Costs in Execution Trading


# Transaction Costs in Execution Trading









In the present work we develop a formalism to tackle the problem of optimal execution when trading market securities. More precisely, we introduce a utility function that balances market impact and timing risk, with this last being modelled as the very negative transaction costs incurred by our order execution. The framework is built upon existing theory on optimal trading strategies, but incorporates characteristics that enable distinctive execution strategies. The formalism is complemented by an analysis of various impact models and different distributional properties of market returns.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.