Optimal order placement in limit order markets
By Rama Cont, A. Kukanov. 2012
82 citations recorded by the source corpus.
To execute a trade, participants in electronic equity markets may choose to submit limit orders or market orders across various exchanges where a stock is traded. This decision is influenced by characteristics of the order flows and queue sizes in each limit order book, as well as the structure of transaction fees and rebates across exchanges. We propose a quantitative framework for studying this order placement problem by formulating it as a convex optimization problem. This formulation allows the study of how the optimal order placement decision depends on the interplay between the state of order books, the fee structure, order flow properties and the aversion to execution risk. In the case of a single exchange, we derive an explicit solution for the optimal split between limit and market orders. For the general case of order placement across multiple exchanges, we propose a stochastic algorithm that computes the optimal routing policy and study the sensitivity of the solution to various parameters. Our algorithm does not require an explicit statistical model of order flow but exploits data on recent order fills across exchanges in the numerical implementation of the algorithm to acquire this information through a supervised learning procedure.
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In Finance
Citations in the corpus
- Recent advances in reinforcement learning in finance (2021, background): “The SOR problem across multiple lit pools (or primary exchanges) was first studied in [53] where the authors formulated the SOR problem as a convex optimization problem.”
- Artificial Neural Networks architectures for stock price prediction: comparisons and applications (2016, background): “Is it worth to mention that, for what concerns the machine learning approaches, they are widely applied also to credit scoring, portfolio management, algorithmic trading, see, [22, 24, 10], respectively.”
- Optimal placement in a limit order book: an analytical approach (2016, unknown): “Indeed, Cont and Kukanov [20] considered an optimal splitting problem across multiple exchanges in a one- period model, where they assumed that one can only choose the market order and the best limit order at each trading venue.”