Articlegreen1998

Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems

281 citations0/0 files storedFinancial Markets Institutions and Instruments

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Financial Markets and Investment Strategies Corporate Finance and Governance Stochastic processes and financial applications

Abstract

This study derives optimal dynamic order submission strategies for trading problems faced by three stylized traders: an uninformed liquidity trader, an informed trader and a value‐motivated trader. Separate solutions are obtained for quote‐ and order‐driven markets. The results provide practicable rules for how to trade small orders and how to manage traders. Transaction cost measurement methods based on implementation shortfall are proven to dominate other methods. Since investors demand liquidity when they submit market orders and supply liquidity when they submit limit orders, the results improve our understanding of market liquidity. In particular, the models illustrate the role of time in the search for liquidity by characterizing the demand for and supply of immediacy.

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References

1983Information Effects on the Bid-Ask Spread 1995An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse 1998Optimal control of execution costs 1986A transaction data study of weekly and intradaily patterns in stock returns 1994Minimum Price Variations, Discrete Bid–Ask Spreads, and Quotation Sizes 1988The implementation shortfall 1996Limit Order Trading 1996Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy

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2008Technology and liquidity provision: The blurring of traditional definitions 2003Informed trade in spot foreign exchange markets: an empirical investigation 2008The information content of an open limit‐order book 2001How Stock Splits Affect Trading: A Microstructure Approach 2004Empirical Analysis of Limit Order Markets 2003Liquidity-Based Competition for Order Flow

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