Optimizing Order Size for FMEX Volume-Based Trading Unlocks

Summary

This article models how to choose an order size for FMEX's proposed debt-unlock program, where part of the daily return depends on a trader's share of each minute's trading volume. It focuses on that minute-based allocation, accounting for taker fees and an expected loss when closing a position. The article derives an expected reward as a function of order size, period volume, unlock value, price, and trading cost, then uses the zero of its derivative to estimate a size that maximizes reward; a negative solution means not trading.

Worked examples illustrate the model under stated assumptions and show that the suggested order size and estimated reward vary with period volume and cost. These are calculations, not evidence of realized profit. The daily allocation component is excluded, actual minute volume is unknown when placing an order, and competing traders may concentrate orders near period end. The author suggests adjusting the timing model and cost assumptions, and notes that immediate reversal would change both the size and cost calculation.

Key ideas

• The optimization focuses on the program's minute-level allocation based on a trader's share of period volume.
• Expected reward accounts for unlock value, order size, period volume, fees, and expected closing loss.
• Setting the reward function's derivative to zero gives the modeled optimal order size, with nonpositive incentives indicating no trade.
• The examples rely on explicit assumptions and do not demonstrate realized returns.
• Unknown period volume and clustered end-of-period orders can make live sizing differ from the calculation.

Tags

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