Optimal Trading with Speed-Dependent Transaction Cost Rates: A Flexible Framework

Optimal Trading with Flexible Speed-Dependent Transaction Costs Transaction cost rates (TCRs) implied by most limit order books (LOBs) display irregular functional forms in trading speeds, making it difficult to fit them using the TCR functions proposed in prior studies. In “Optimal Trading with Speed-Dependent Transaction Cost Rates: A Flexible Framework,” Liu, Qian, and Xu develop a workhorse model to study optimal trade execution with general TCR functions. The piecewise linear TCR function form in the model can approximate any TCR functions. The authors characterize important features of the optimal trading strategy. The model simultaneously generates order-shredding and U-shape trading patterns for large required trades. In addition, the authors demonstrate that implementing common naive trading strategies, such as trading all the position instantly, or at a constant speed, or incorrectly assuming linear TCR function, can be costly.