Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems
Posted: 10 Sep 1999
Date Written: June 1, 1994
Optimal dynamic limit and market order submission and resubmission strategies are derived for several stylized trading problems. Separate solutions are obtained for quote- and order-driven markets. The results provide practical rules for how to trade small orders and how to manage traders. Transaction cost measurement methods based on implementation shortfall are proven to dominate other methods. Since investors demand liquidity when they submit market orders and supply liquidity when they submit limit orders, the results improve our understanding of market liquidity. In particular, the models illustrate the role of time in the search for liquidity by characterizing the demand for and supply of immediacy.
JEL Classification: G14, G24
Suggested Citation: Suggested Citation