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Optimal Order Execution in Intraday Markets: Minimizing Costs in Trade Trajectories

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  • Christopher Kath
  • Florian Ziel

Abstract

Optimal execution, i.e., the determination of the most cost-effective way to trade volumes in continuous trading sessions, has been a topic of interest in the equity trading world for years. Electricity intraday trading slowly follows this trend but is far from being well-researched. The underlying problem is a very complex one. Energy traders, producers, and electricity wholesale companies receive various position updates from customer businesses, renewable energy production, or plant outages and need to trade these positions in intraday markets. They have a variety of options when it comes to position sizing or timing. Is it better to trade all amounts at once? Should they split orders into smaller pieces? Taking the German continuous hourly intraday market as an example, this paper derives an appropriate model for electricity trading. We present our results from an out-of-sample study and differentiate between simple benchmark models and our more refined optimization approach that takes into account order book depth, time to delivery, and different trading regimes like XBID (Cross-Border Intraday Project) trading. Our paper is highly relevant as it contributes further insight into the academic discussion of algorithmic execution in continuous intraday markets and serves as an orientation for practitioners. Our initial results suggest that optimal execution strategies have a considerable monetary impact.

Suggested Citation

  • Christopher Kath & Florian Ziel, 2020. "Optimal Order Execution in Intraday Markets: Minimizing Costs in Trade Trajectories," Papers 2009.07892, arXiv.org, revised Oct 2020.
    • Handle: RePEc:arx:papers:2009.07892
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    References listed on IDEAS

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    Cited by:

    1. Siyuan Li & Hui Niu & Jiani Lu & Peng Liu, 2024. "Joint Learning of Volume Scheduling and Order Placement Policies for Optimal Order Execution," Mathematics, MDPI, vol. 12(21), pages 1-17, November.
    2. Narajewski, Michał & Ziel, Florian, 2022. "Optimal bidding in hourly and quarter-hourly electricity price auctions: Trading large volumes of power with market impact and transaction costs," Energy Economics, Elsevier, vol. 110(C).
    3. Simon Hirsch & Florian Ziel, 2022. "Simulation-based Forecasting for Intraday Power Markets: Modelling Fundamental Drivers for Location, Shape and Scale of the Price Distribution," Papers 2211.13002, arXiv.org.
    4. Thomas Kuppelwieser & David Wozabal, 2023. "Intraday power trading: toward an arms race in weather forecasting?," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(1), pages 57-83, March.
    5. Micha{l} Narajewski & Florian Ziel, 2021. "Optimal bidding in hourly and quarter-hourly electricity price auctions: trading large volumes of power with market impact and transaction costs," Papers 2104.14204, arXiv.org, revised Feb 2022.
    6. Demir, Sumeyra & Stappers, Bart & Kok, Koen & Paterakis, Nikolaos G., 2022. "Statistical arbitrage trading on the intraday market using the asynchronous advantage actor–critic method," Applied Energy, Elsevier, vol. 314(C).

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