scholarly journals Limit Order Strategic Placement with Adverse Selection Risk and the Role of Latency

2017 ◽  
Vol 03 (01) ◽  
pp. 1750009 ◽  
Author(s):  
Charles-Albert Lehalle ◽  
Othmane Mounjid
Keyword(s):  
Adverse Selection ◽  
Optimal Strategies ◽  
Added Value ◽  
Limit Order ◽  
Market Makers ◽  
Market Participants ◽  
Limit Orders ◽  
Control Framework ◽  
Stochastic Framework ◽  
The Cost

This paper is split in three parts: first, we use labeled trade data to exhibit how market participants’ decisions depend on liquidity imbalance; then, we develop a stochastic control framework where agents monitor limit orders, by exploiting liquidity imbalance, to reduce adverse selection. For limit orders, we need optimal strategies essentially to find a balance between fast execution and avoiding adverse selection: if the price has chances to go down, the probability to be filled is high, but it is better to wait a little more to get a better price. In a third part, we show how the added value of exploiting liquidity imbalance is eroded by latency: being able to predict future liquidity consuming flows is of less use if you do not have enough time to cancel and reinsert your limit orders. There is thus a rationale for market makers to be as fast as possible to reduce adverse selection. Latency costs of our limit order driven strategy can be measured numerically. To authors’ knowledge, this paper is the first to make the connection between empirical evidences, a stochastic framework for limit orders including adverse selection, and the cost of latency. Our work is a first step to shed light on the role played by latency and adverse selection in optimal limit order placement.

scholarly journals Optimal inventory management and order book modeling

2019 ◽  
Vol 65 ◽  
pp. 145-181 ◽  
Author(s):  
Nicolas Baradel ◽  
Bruno Bouchard ◽  
David Evangelista ◽  
Othmane Mounjid
Keyword(s):  
Inventory Management ◽  
High Frequency ◽  
Limit Order Book ◽  
Order Book ◽  
Value Functions ◽  
Limit Order ◽  
Terminal Wealth ◽  
Market Makers ◽  
Market Participants ◽  
The One

We model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [12, 18, 19], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy.

scholarly journals The Impact of Iceberg Orders in Limit Order Books

2017 ◽  
Vol 07 (03) ◽  
pp. 1750007 ◽  
Author(s):  
Stefan Frey ◽  
Patrik Sandås
Keyword(s):  
Informed Trading ◽  
Price Impact ◽  
Order Book ◽  
Limit Order ◽  
Reduced Order ◽  
Market Participants ◽  
Limit Orders ◽  
Order Books ◽  
Limit Order Books ◽  
The Impact

We examine the impact of iceberg orders on the price and order flow dynamics in limit order books. Iceberg orders allow traders to simultaneously hide a large portion of their order size and signal their interest in trading to the market. We show that when market participants detect iceberg orders they tend to strongly respond by submitting matching market orders consistent with iceberg orders facilitating the search for latent liquidity. The greater the fraction of an iceberg order that is executed, the smaller is its price impact consistent with liquidity rather than informed trading. The presence of iceberg orders is associated with increased trading consistent with a positive liquidity externality, but the reduced order book transparency associated with iceberg orders also creates an adverse selection cost for limit orders that may partly offset any gains.

scholarly journals How much market making does a market need?

2018 ◽  
Vol 55 (3) ◽  
pp. 667-681
Author(s):  
Vít Peržina ◽  
Jan M. Swart
Keyword(s):  
Equilibrium Distribution ◽  
Limit Order Book ◽  
Walrasian Equilibrium ◽  
Order Book ◽  
Limit Order ◽  
Demand And Supply ◽  
Market Makers ◽  
Limit Orders ◽  
Bid Price ◽  
Random Level

AbstractWe consider a simple model for the evolution of a limit order book in which limit orders of unit size arrive according to independent Poisson processes. The frequencies of buy limit orders below a given price level, respectively sell limit orders above a given level, are described by fixed demand and supply functions. Buy (respectively, sell) limit orders that arrive above (respectively, below) the current ask (respectively, bid) price are converted into market orders. There is no cancellation of limit orders. This model has been independently reinvented by several authors, including Stigler (1964), and Luckock (2003), who calculated the equilibrium distribution of the bid and ask prices. We extend the model by introducing market makers that simultaneously place both a buy and sell limit order at the current bid and ask price. We show that introducing market makers reduces the spread, which in the original model was unrealistically large. In particular, we calculate the exact rate at which market makers need to place orders in order to close the spread completely. If this rate is exceeded, we show that the price settles at a random level that, in general, does not correspond to the Walrasian equilibrium price.

Implementasi Analisis Proses Bisnis Sebagai Upaya Pengurangan Biaya

2019 ◽  
Vol 10 (1) ◽  
pp. 1-27
Author(s):  
Aniek Wijayanti
Keyword(s):  
Business Process ◽  
Cost Reduction ◽  
Process Analysis ◽  
Value Added ◽  
Added Value ◽  
Natural Material ◽  
Management Activity ◽  
Procurement Process ◽  
Material Procurement ◽  
The Cost

Business Process Analysis can be used to eliminate or reduce a waste cost caused by non value added activities that exist in a process. This research aims at evaluating activities carried out in the natural material procurement process in the PT XYZ, calculating the effectiveness of the process cycle, finding a way to improve the process management, and calculating the cost reduction that can achieved by activity management. A case study was the approach of this research. The researcher obtained research data throughout deep interviews with the staff who directly involved in the process, observation, and documentation of natural material procurement. The result of this study show that the effectiveness of the process cycle of natural material procurement in the factory reached as much as 87,1% for the sand material and 72% for the crushed stone. This indicates that the process still carry activities with no added value and still contain ineffective costs. Through the Business Process Mechanism, these non value added activities can be managed so that the process cycle becomes more efficient and cost effectiveness is achieved. The result of the effective cycle calculation after the management activities implementation is 100%. This means that the cost of natural material procurement process has become effective. The result of calculation of the estimated cost reduction as a result of management activity is as much as Rp249.026.635,90 per year.

Large Option Trades, Market Makers, and Limit Orders

CFA Digest ◽  
1997 ◽  
Vol 27 (2) ◽  
pp. 47-48
Author(s):  
Terence M. Lim
Keyword(s):  
Market Makers ◽  
Limit Orders

scholarly journals Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

2012 ◽  
Vol 102 (1) ◽  
pp. 29-59 ◽  
Author(s):  
Jean Tirole
Keyword(s):  
Mechanism Design ◽  
Adverse Selection ◽  
Welfare Cost ◽  
Public Intervention ◽  
The Government ◽  
The Cost

The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost. (JEL D82, D83, G01, G31, H81)

scholarly journals Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory

2013 ◽  
Vol 2013 ◽  
pp. 1-8 ◽  
Author(s):  
Kai Chang
Keyword(s):  
Futures Market ◽  
Time Varying ◽  
Conditional Volatility ◽  
Conditional Correlation ◽  
Spot Prices ◽  
Market Participants ◽  
Hedging Effectiveness ◽  
Hedge Ratios ◽  
Cost Of Carry ◽  
The Cost

Under departures from the cost-of-carry theory, traded spot prices and conditional volatility disturbed from futures market have significant impacts on futures price of emissions allowances, and then we propose time-varying hedge ratios and hedging effectiveness estimation using ECM-GARCH model. Our empirical results show that conditional variance, conditional covariance, and their correlation between between spot and futures prices exhibit time-varying trends. Conditional volatility of spot prices, conditional volatility disturbed from futures market, and conditional correlation of market noises implied from spot and futures markets have significant effects on time-varying hedge ratios and hedging effectiveness. In the immature emissions allowances market, market participants optimize portfolio sizes between spot and futures assets using historical market information and then achieve higher risk reduction of assets portfolio revenues; accordingly, we can obtain better hedging effectiveness through time-varying hedge ratios with departures from the cost-of-carry theory.

scholarly journals Features of the functioning of the Ukrainian market for design work and the development of design in a pandemic.

2021 ◽  
Vol 2 (47) ◽  
pp. 11-24
Author(s):  
L.V. Shumak
Keyword(s):  
Construction Industry ◽  
Added Value ◽  
High Price ◽  
Highly Qualified ◽  
Design Work ◽  
Industrial Enterprises ◽  
Positioning Strategy ◽  
Economic Characteristic ◽  
High Level ◽  
The Cost

The market for design work in civil and industrial construction was one of the first to react to the crisis trends during a pandemic in the economy. Back in 2013, the volume of orders declined, and the peak of the decline was in 2014. The main reason for the difficulties is the reduction in investment programs of civil and industrial enterprises, and developers. The Ukrainian market for design works is distinguished by a high level of competition. A large number of design companies are actively working in this market niche. This fact constantly pushes market participants to take active steps to adjust the competitive strategy, positioning strategy and pricing. The primary signs of a crisis in design are also recognized through price indicators, which personify both the cost of the project or design services, and the results of the project enterprise, taking into account the factors that form the price level. In recent years, the price indicators of the construction industry have been unstable and completely dependent on external market conditions. Price as an economic characteristic is a significant regulator in the project market of Ukraine and abroad. The design market is the backbone of the construction industry with a volume of over UAH 1 billion per year and high added value. The field requires highly qualified staffing and the introduction of modern technologies. Outdated systems of training, certification of specialists and technical regulation hinder the development of the project market in Ukraine. The market is prone to underestimated cost of design work. In 2018, the share of design in the total cost of construction in Ukraine averaged 1.5-2%; in France it was 8-13%, and in Great Britain the level reached 10-17%. There is practically no system of state orders for design. Today our market is characterized by technological backwardness. The work of designers is low-paid, which, accordingly, affects the quality. High-quality architecture is more expensive than low-quality one. In Ukraine, the demand for quality design is just beginning to emerge. In this regard, it is very important to create a competitive environment that will contribute to development. The project market, like the construction industry as a whole, is extremely heterogeneous. Currently, there are thousands of various design bureaus and small workshops in Ukraine, employing no more than ten people, and the number of freelance designers cannot be statistically estimated. Prices for design, as well as the approaches used to provide services, differ dramatically in these organizations. A high price for a service does not necessarily guarantee that the quality of its delivery will be the same. Therefore, first of all, one should imagine what kind of work will be performed and what their essence is. Many investors prefer to design their facilities using the services of European specialists. What are the features and secrets of the Ukrainian project market? Are there really so few good designers in their country, and by what parameters can they still be found? The article examines the features of the functioning of the Ukrainian market for design work and the development of design in a pandemic.

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