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Optimal Execution with Identity Optionality

Optimal Execution with Identity Optionality This paper investigates the impact of anonymous trading on the agents' strategy in an optimal execution framework. It mainly explores the specificity of order attribution on the Toronto Stock Exchange, where brokers can choose to either trade with their own identity or under a generic anonymous code that is common to all the brokers. We formulate a stochastic differential game for the optimal execution problem of a population of N brokers and incorporate permanent and temporary price impacts for both the identity-revealed and anonymous trading processes. We then formulate the limiting mean-field game of controls with common noise and obtain a solution in closed-form via the probablistic approach for the Almgren-Chris price impact framework. Finally, we perform a sensitivity analysis to explore the impact of the model parameters on the optimal strategy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

Optimal Execution with Identity Optionality

Carmona, René; Zeng, Claire
Applied Mathematical Finance , Volume 29 (4): 27 – Jul 4, 2022
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Publisher
Taylor & Francis
Copyright
© 2023 Informa UK limited, trading as Taylor & Francis Group
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/1350486X.2023.2193343
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the impact of anonymous trading on the agents' strategy in an optimal execution framework. It mainly explores the specificity of order attribution on the Toronto Stock Exchange, where brokers can choose to either trade with their own identity or under a generic anonymous code that is common to all the brokers. We formulate a stochastic differential game for the optimal execution problem of a population of N brokers and incorporate permanent and temporary price impacts for both the identity-revealed and anonymous trading processes. We then formulate the limiting mean-field game of controls with common noise and obtain a solution in closed-form via the probablistic approach for the Almgren-Chris price impact framework. Finally, we perform a sensitivity analysis to explore the impact of the model parameters on the optimal strategy.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Jul 4, 2022

Keywords: Optimal execution; anonymous trading; conditional propagation of chaos; mean field game

References

  • Predatory Trading
  • Mean Field Game of Controls and An Application to Trade Crowding
  • Episodic Liquidity Crises: Cooperative and Predatory Trading
  • A Probabilistic Weak Formulation of Mean Field Games and Applications
  • Incorporating Order-flow Into Optimal Execution
  • Why Do Traders Choose to Trade Anonymously
  • Convex Analysis for LQG Systems with Applications to Major–minor LQG Mean–field Game Systems
  • No-dynamic-arbitrage and Market Impact
  • Large Population Stochastic Dynamic Games: Closed-loop McKean-Vlasov Systems and the Nash Certainty Equivalence Principle
  • Jeux à Champ Moyen. I – Le Cas Stationnaire
  • Jeux à Champ Moyen. II – Horizon Fini Et Contrôle Optimal
  • Mean Field Games
  • Optimal Trading Strategy and Supply/demand Dynamics
  • Anonymity, Adverse Selection and the Sorting of Interdealer Trades