On the Design of Sell-Side Limit and Market Order Tactics

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.

Keywords: algorithmic trading, market microstructure

JEL Classification: G10, G12