Choosing Limit Order Size Around Execution Urgency and Market Impact

Summary

The document asks how much of a large equity order should be displayed as a limit order at a chosen price. The responses frame order sizing as part of an execution decision rather than as a single universal fraction. A trader must weigh the desire to complete the order promptly against market impact and the risk that the trading signal loses value while waiting. Execution algorithms can slice a parent order into smaller child orders according to chosen parameters, while an execution desk or broker may offer different strategies.

Other suggested mechanisms include accumulate-and-distribute execution, iceberg orders that conceal part of displayed size, and limit-on-close orders for participation in the closing auction. These are alternatives, not a quantified optimization recipe: the document provides no model for estimating market impact, fill probability, or the best displayed quantity. Its practical lesson is to select an execution approach based on urgency and alpha decay, then configure or choose an algorithm accordingly. The examples are general and do not establish that any one method suits every stock, order size, or market condition.

Key ideas

• There is no single limit order size identified as optimal for every large trade.
• Execution planning balances immediacy against market impact and the decay of a trading signal.
• Algorithms can divide a parent order into smaller child orders according to execution parameters.
• Accumulate-and-distribute, iceberg, and limit-on-close orders are presented as possible alternatives.
• The document gives no quantitative framework for calculating an optimal order size.

Tags

# What's the optimal way to size a limit order?


# What's the optimal way to size a limit order?












Say Bob wants to buy \$30 million worth of APPL stock at a price of \$130.

He decides to use a limit order.

But posting a $30 million limit order would drive the price up and prevent him from being filled.

Obviously he must post only a fraction of this amount and then slowly top it up each time he gets filled. But what fraction? Should he post \$1 million? \$1000? or even \$10?

What variables decide what size or amount of \$ he should post? Surely there must exist an optimal amount, but what is it?

## Answer by JoshK (score 1)

https://quant.stackexchange.com/a/68595

Today 99% of these orders are executed by algos. All of the main brokers offer a suite of these tools to their trader. Here's an example of one such strategy offered by CS: https://plus.credit-suisse.com/r/V7oShS2AN-ZQ55.html

The modern market trades in 100 (or fewer) share increments. There's no practical way that a trader could manually work a large order piece by piece.

Instead the trader figures out how he wants to balance the trade-off between imediacy of execution and decay of alpha. Once he has a handle on that he picks the algo that he thinks is most appropriate. Then he sends the order off to whatever dealer/algo he likes the best.

The algo then will chip away at the order according to it's parameters.

You can see BAML's offerings here as well: https://business.bofa.com/en-us/content/high-touch-electronic-trading.html

## Answer by Sergei Rodionov (score 0)

https://quant.stackexchange.com/a/60905

Here are some alternatives:

- Utilize Accumulate Distribute algorithm to reduce market impact.

- Place an iceberg order.

- Place a LOC (limit on close) order to execute it at the closing cross.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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