Optimal Execution with Dynamic Order Flow Imbalance

We examine optimal execution models that take into account both market microstructure impact and informational costs. Informational footprint is related to order flow and is represented by the trader's influence on the flow imbalance process, while microstructure influence is captured by instantaneous price impact. We propose a continuous-time stochastic control problem that balances between these two costs. Incorporating order flow imbalance leads to the consideration of the current market state and specifically whether one's orders lean with or against the prevailing order flow, key components often ignored by execution models in the literature. In particular, to react to changing order flow, we endogenize the trading horizon $T$. After developing the general indefinite-horizon formulation, we investigate several tractable approximations that sequentially optimize over price impact and over $T$. These approximations, especially a dynamic version based on receding horizon control, are shown to be very accurate and connect to the prevailing Almgren-Chriss framework. We also discuss features of empirical order flow and links between our model and "Optimal Execution Horizon" by Easley et al (Mathematical Finance, 2013).Comment: 31 pages, 8 figure

Order parameter model for unstable multilane traffic flow

We discuss a phenomenological approach to the description of unstable vehicle motion on multilane highways that explains in a simple way the observed sequence of the phase transitions "free flow -> synchronized motion -> jam" as well as the hysteresis in the transition "free flow synchronized motion". We introduce a new variable called order parameter that accounts for possible correlations in the vehicle motion at different lanes. So, it is principally due to the "many-body" effects in the car interaction, which enables us to regard it as an additional independent state variable of traffic flow. Basing on the latest experimental data (cond-mat/9905216) we assume that these correlations are due to a small group of "fast" drivers. Taking into account the general properties of the driver behavior we write the governing equation for the order parameter. In this context we analyze the instability of homogeneous traffic flow manifesting itself in both of the mentioned above phase transitions where, in addition, the transition "synchronized motion -> jam" also exhibits a similar hysteresis. Besides, the jam is characterized by the vehicle flows at different lanes being independent of one another. We specify a certain simplified model in order to study the general features of the car cluster self-formation under the phase transition "free flow synchronized motion". In particular, we show that the main local parameters of the developed cluster are determined by the state characteristics of vehicle motion only.Comment: REVTeX 3.1, 10 pages with 10 PostScript figure

Regularities and Irregularities in Order Flow Data

We identify and analyze statistical regularities and irregularities in the recent order flow of different NASDAQ stocks, focusing on the positions where orders are placed in the orderbook. This includes limit orders being placed outside of the spread, inside the spread and (effective) market orders. We find that limit order placement inside the spread is strongly determined by the dynamics of the spread size. Most orders, however, arrive outside of the spread. While for some stocks order placement on or next to the quotes is dominating, deeper price levels are more important for other stocks. As market orders are usually adjusted to the quote volume, the impact of market orders depends on the orderbook structure, which we find to be quite diverse among the analyzed stocks as a result of the way limit order placement takes place.Comment: 10 pages, 9 figure

Understanding Order Flow

This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the re-maining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end?user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy.Exchange rates, forecasting, microstructure, order flow

Competition for order flow as a coordination game

Competition for order flow can be characterized as a coordination game with multiple equilibria. Analyzing competition between dealer markets and a crossing network, we show that the crossing network is more stable for lower traders’ disutilities from unexecuted orders. By introducing private information, we prove existence of a unique equilibrium with market consolidation. Assets with low volatility and large volumes are traded on crossing networks, others on dealer markets. Efficiency requires more assets to be traded on crossing networks. If traders’ disutilities differ sufficiently, a unique equilibrium with market fragmentation exists. Low disutility traders use the crossing network while high disutility traders use the dealer market. The crossing network’s market share is inefficiently small

Magnetohydrodynamic Viscous Flow Over a Shrinking Sheet With Second Order Slip Flow Model

In this paper, we investigate the magnetohydrodynamic viscous flow with second order slip flow model over a permeable shrinking surface. We have obtained the closed form of exact solution of Navier-Stokes equations by using similarity variable technique. The effects of slip, suction and magnetic parameter have been investigated in detail. The results show that there are two solution branches, namely lower and upper solution branch. The behavior of velocity and shear stress profiles for different values of slip, suction and magnetic parameters has been discussed through graphs.Comment: 13 Pages, 8 Figures. Accepted for Publication in Heat Transfer Researc

The adaptive nature of liquidity taking in limit order books

In financial markets, the order flow, defined as the process assuming value one for buy market orders and minus one for sell market orders, displays a very slowly decaying autocorrelation function. Since orders impact prices, reconciling the persistence of the order flow with market efficiency is a subtle issue. A possible solution is provided by asymmetric liquidity, which states that the impact of a buy or sell order is inversely related to the probability of its occurrence. We empirically find that when the order flow predictability increases in one direction, the liquidity in the opposite side decreases, but the probability that a trade moves the price decreases significantly. While the last mechanism is able to counterbalance the persistence of order flow and restore efficiency and diffusivity, the first acts in opposite direction. We introduce a statistical order book model where the persistence of the order flow is mitigated by adjusting the market order volume to the predictability of the order flow. The model reproduces the diffusive behaviour of prices at all time scales without fine-tuning the values of parameters, as well as the behaviour of most order book quantities as a function of the local predictability of order flow.Comment: 40 pages, 14 figures, and 2 tables; old figure 12 removed. Accepted for publication on JSTA