Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems
Version of Record online: 26 DEC 2001
New York University Salomon Center 1998
Financial Markets, Institutions & Instruments
Volume 7, Issue 2, pages 1–76, May 1998
How to Cite
Harris, L. (1998), Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems. Financial Markets, Institutions & Instruments, 7: 1–76. doi: 10.1111/1468-0416.00019
- Issue online: 26 DEC 2001
- Version of Record online: 26 DEC 2001
- Cited By
This study derives optimal dynamic order submission strategies for trading problems faced by three stylized traders: an uninformed liquidity trader, an informed trader and a value-motivated trader. Separate solutions are obtained for quote- and order-driven markets. The results provide practicable 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.