On the design of sell-side limit and market order tactics

TL;DR

This paper introduces a comprehensive framework for evaluating and optimizing sell-side order tactics, considering market impact, liquidity constraints, and execution costs to improve trading strategies.

Contribution

It presents a novel framework for assessing limit order tactics and formulates the optimal execution problem with nonlinear impact and liquidity constraints.

Findings

Framework effectively evaluates fill prices and costs.

Incorporates tactics into the uncertainty bands framework.

Addresses nonlinear market impact and liquidity constraints.

Abstract

This article provides a novel framework to evaluate limit order tactics that highlights expected fill price, adverse price selection cost, and opportunity cost. We formulate the problem of optimal execution of market orders with nonlinear market impact, power law decay kernel, and stochastic and deterministic liquidity constraints. We demonstrate how these tactics can be incorporated in the uncertainty bands framework.