Breaking Up Large Futures Orders with Execution Algorithms
Summary
The document addresses how to execute a large futures order in a thin order book while limiting market impact. It recommends splitting an order algorithmically instead of submitting a large market order. VWAP is presented as a straightforward, widely available choice, while Arrival Price is mentioned as a more sophisticated alternative that may not be offered by every broker. The answers do not provide parameter settings or a comparison of realized execution costs.
A second answer cautions that futures execution depends on contract-specific market microstructure. Treasury futures can have roll activity from traders avoiding delivery, and Treasury spread contracts may use split FIFO and pro-rata matching. Under that allocation rule, the answer suggests that larger resting limit orders and marketable limit orders can be attractive, while order-book size may vary rapidly. These observations are specific to certain contract types and matching rules, so they should not be generalized to every futures market. The document offers practical considerations, not empirical evidence or a complete execution algorithm.
Key ideas
- Splitting a large order can reduce the market impact of trading in a thin book.
- VWAP is a straightforward execution algorithm, while Arrival Price is a more advanced option where available.
- Futures execution strategies can depend on contract-specific microstructure and matching rules.
- Split FIFO and pro-rata allocation can affect limit-order sizing and the appeal of marketable limit orders.
- The recommendations are not supported by execution-cost data and may not apply across all futures contracts.
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Full text
# How to execute a large futures order? # How to execute a large futures order? I am currently trading futures products on some contracts that have low volumes. More accurately, the volumes of working orders in the book are fairly light. I am trying to execute a relatively large order that could move the market. I would like to break the order up to prevent this but I am unsure of the best algorithm to do it. I know there are iceberg orders but is there any other way to do this? ## Answer by chrisaycock (score 7, accepted) https://quant.stackexchange.com/a/132 You are correct that large orders should be algorithmically broken-up. Perhaps the most straightforward algo is the VWAP (volume-weighted average price), which most brokers offer. Since a VWAP is easy to compute, the trading details are often transparent to the user. There are more sophisticated algos, like Arrival Price, though not every broker offers these. Here's a list of common broker algos. In general, refrain from submitting a standard market order for a large number of contracts and you should be alright. ## Answer by Ryogi (score 7) https://quant.stackexchange.com/a/2184 For reference, note that execution strategies for some types of futures contracts can be very different from equities. An example are Interest Rate Futures, e.g. here. The main reason lies in microstructure differences. For some more details see the white paper "US Treasury Futures Roll Microstructure Basics" by Quantitative Brokers (I have no affiliation with QB). Very briefly: - Traders that don't want to take delivery roll over their positions, - The matching algo for Treasury spread contracts is “Split FIFO/Pro-Rata.” Fills are allocated so that a percentage of every order is filled either FIFO or pro-rata. Few consequences of the “Split FIFO/Pro-Rata” matching are: - The optimal strategy is to oversize limit orders; - Marketable limit orders are attractive (new top order is filled with FIFO); - Empirically there are rapid variations in order size.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.