IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v281y2019i1d10.1007_s10479-019-03150-0.html
   My bibliography  Save this article

Stylized algorithmic trading: satisfying the predictive near-term demand of liquidity

Author

Listed:
  • Edward W. Sun

    (KEDGE Business School)

  • Timm Kruse

    (InfoTech)

  • Yi-Ting Chen

    (College of Computer Science, National Chiao Tung University)

Abstract

Regulatory reform enacted (e.g., the Dodd-Frank Act enforced in the U.S.) requires the financial service industry to consider the “reasonably expected near term demand” (i.e., RENTD) in trading. To manage the price impact and transaction cost associated with orders submitted to an order driven market, market makers or specialists must determine their trading styles (aggressive, neutral, or passive) based on the market liquidity in response to RENTD, particularly for trading a large quantity of some financial instrument. In this article we introduce a model considering different trading styles to satisfy the predictive near-term customer demand of market liquidity in order to find an optimal order submission strategy based on different market situations. We show some analytical properties and numerical performances of our model in search of optimal solutions. We evaluate the performances of our model with simulations run over a set of experiments in comparison with two alternative strategies. Our results suggest that the proposed model illustrates superiority in performance.

Suggested Citation

  • Edward W. Sun & Timm Kruse & Yi-Ting Chen, 2019. "Stylized algorithmic trading: satisfying the predictive near-term demand of liquidity," Annals of Operations Research, Springer, vol. 281(1), pages 315-347, October.
    • Handle: RePEc:spr:annopr:v:281:y:2019:i:1:d:10.1007_s10479-019-03150-0
    DOI: 10.1007/s10479-019-03150-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-019-03150-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-019-03150-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Edward Sun & Timm Kruse & Min-Teh Yu, 2015. "Financial Transaction Tax: Policy Analytics Based on Optimal Trading," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 103-141, June.
    2. Bessembinder, Hendrik & Carrion, Allen & Tuttle, Laura & Venkataraman, Kumar, 2016. "Liquidity, resiliency and market quality around predictable trades: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 121(1), pages 142-166.
    3. Edward Sun & Timm Kruse & Min-Teh Yu, 2014. "High frequency trading, liquidity, and execution cost," Annals of Operations Research, Springer, vol. 223(1), pages 403-432, December.
    4. Albert S. Kyle & Anna A. Obizhaeva, 2016. "Market Microstructure Invariance: Empirical Hypotheses," Econometrica, Econometric Society, vol. 84, pages 1345-1404, July.
    5. Gerig, Austin & Michayluk, David, 2017. "Automated liquidity provision," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 1-13.
    6. Aur'elien Alfonsi & Antje Fruth & Alexander Schied, 2007. "Optimal execution strategies in limit order books with general shape functions," Papers 0708.1756, arXiv.org, revised Feb 2010.
    7. Doron Avramov & Tarun Chordia & Amit Goyal, 2006. "The Impact of Trades on Daily Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1241-1277.
    8. Aurelien Alfonsi & Antje Fruth & Alexander Schied, 2010. "Optimal execution strategies in limit order books with general shape functions," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 143-157.
    9. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    10. Edward M. H. Lin & Edward W. Sun & Min-Teh Yu, 2018. "Systemic risk, financial markets, and performance of financial institutions," Annals of Operations Research, Springer, vol. 262(2), pages 579-603, March.
    11. George C. Chacko & Jakub W. Jurek & Erik Stafford, 2008. "The Price of Immediacy," Journal of Finance, American Finance Association, vol. 63(3), pages 1253-1290, June.
    12. Foucault, Thierry & Pagano, Marco & Roell, Ailsa, 2013. "Market Liquidity: Theory, Evidence, and Policy," OUP Catalogue, Oxford University Press, number 9780199936243.
    13. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, vol. 13(2), pages 181-204, April.
    14. Michael A. Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2009. "Brokerage Commissions and Institutional Trading Patterns," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5175-5212, December.
    15. Ting, Christopher & Warachka, Mitch & Zhao, Yonggan, 2007. "Optimal liquidation strategies and their implications," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1431-1450, April.
    16. Albert S. Kyle & Anna A. Obizhaeva, 2016. "Market Microstructure Invariance: Empirical Hypotheses," Econometrica, Econometric Society, vol. 84(4), pages 1345-1404, July.
    17. Werner, Ingrid M., 2003. "NYSE order flow, spreads, and information," Journal of Financial Markets, Elsevier, vol. 6(3), pages 309-335, May.
    18. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    19. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    20. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
    21. Anne Jones Dorn & Daniel Dorn & Paul Sengmueller, 2015. "Trading as Gambling," Management Science, INFORMS, vol. 61(10), pages 2376-2393, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barbara Będowska-Sójka, 2021. "Is liquidity wasted? The zero-returns on the Warsaw Stock Exchange," Annals of Operations Research, Springer, vol. 297(1), pages 37-51, February.
    2. Giacomo Morelli, 2021. "Liquidity drops," Annals of Operations Research, Springer, vol. 299(1), pages 711-719, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Edward Sun & Timm Kruse & Min-Teh Yu, 2015. "Financial Transaction Tax: Policy Analytics Based on Optimal Trading," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 103-141, June.
    2. Olivier Guéant & Charles-Albert Lehalle, 2015. "General Intensity Shapes In Optimal Liquidation," Mathematical Finance, Wiley Blackwell, vol. 25(3), pages 457-495, July.
    3. Aurélien Alfonsi & Alexander Schied, 2010. "Optimal trade execution and absence of price manipulations in limit order book models," Post-Print hal-00397652, HAL.
    4. Nikolay A. Andreev, 2015. "Worst-Case Approach To Strategic Optimal Portfolio Selection Under Transaction Costs And Trading Limits," HSE Working papers WP BRP 45/FE/2015, National Research University Higher School of Economics.
    5. Peter Kratz & Torsten Schoneborn, 2012. "Portfolio liquidation in dark pools in continuous time," Papers 1201.6130, arXiv.org, revised Aug 2012.
    6. Qinghua Li, 2014. "Facilitation and Internalization Optimal Strategy in a Multilateral Trading Context," Papers 1404.7320, arXiv.org, revised Jan 2015.
    7. Lokka, A. & Xu, Junwei, 2020. "Optimal liquidation trajectories for the Almgren-Chriss model," LSE Research Online Documents on Economics 106977, London School of Economics and Political Science, LSE Library.
    8. Olivier Guéant, 2016. "The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making," Post-Print hal-01393136, HAL.
    9. Jan Kallsen & Johannes Muhle-Karbe, 2014. "High-Resilience Limits of Block-Shaped Order Books," Papers 1409.7269, arXiv.org.
    10. Kashyap, Ravi, 2020. "David vs Goliath (You against the Markets), A dynamic programming approach to separate the impact and timing of trading costs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 545(C).
    11. repec:dau:papers:123456789/7391 is not listed on IDEAS
    12. Arne Lokka & Junwei Xu, 2020. "Optimal liquidation trajectories for the Almgren-Chriss model with Levy processes," Papers 2002.03376, arXiv.org, revised Sep 2020.
    13. Edward W. Sun & Timm Kruse, 2013. "Economic Modeling for Optimal Trading of Financial Asset in Volatile Market," Economics Bulletin, AccessEcon, vol. 33(3), pages 1788-1795.
    14. Siu, Chi Chung & Guo, Ivan & Zhu, Song-Ping & Elliott, Robert J., 2019. "Optimal execution with regime-switching market resilience," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 17-40.
    15. Olivier Gu'eant, 2013. "Permanent market impact can be nonlinear," Papers 1305.0413, arXiv.org, revised Mar 2014.
    16. Weston Barger & Matthew Lorig, 2019. "Optimal Liquidation Under Stochastic Price Impact," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-28, March.
    17. Ibrahim Ekren & Johannes Muhle-Karbe, 2017. "Portfolio Choice with Small Temporary and Transient Price Impact," Papers 1705.00672, arXiv.org, revised Apr 2020.
    18. Peter Bank & Mete Soner & Moritz Vo{ss}, 2015. "Hedging with Temporary Price Impact," Papers 1510.03223, arXiv.org, revised Jul 2016.
    19. Weston Barger & Matthew Lorig, 2018. "Optimal liquidation under stochastic price impact," Papers 1804.04170, arXiv.org.
    20. Härdle, Wolfgang Karl & Hautsch, Nikolaus & Mihoci, Andrija, 2012. "Modelling and forecasting liquidity supply using semiparametric factor dynamics," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 610-625.
    21. Masaaki Fujii, 2015. "Optimal Position Management for a Market Maker with Stochastic Price Impacts," CARF F-Series CARF-F-360, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Sep 2015.

    More about this item

    Keywords

    Artificial intelligence; Algorithmic trading; Decision analytics; Discrete optimization; FinTech; Liquidity;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:281:y:2019:i:1:d:10.1007_s10479-019-03150-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.