Optimal execution with a price limiter

Balancing the price uncertainty and price impact of large orders is an important issue for many market participants. While classical approaches lead to trading algorithms that are invariably price-path insensitive, in this article, Sebastian Jaimungal and Damir Kinzebulatov demonstrate how price limits set by traders can be incorporated into an optimal trading strategy and show how their approach is both computationally efficient and reduces the downside risks of the trade



An agent who aims to acquire (or liquidate) a large quantity of a given security by a specified time has to balance the negative effects trading quickly has on execution price against the negative effects trading slowly has on price uncertainty. That is, the agent aims to find an optimal execution rate to minimise (maximise) its costs (profit) while at the same time offsetting the risk of the trade.

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