Metaorder limit prices in evaluating expected market impact and assessing execution service quality
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Received June 19, 2019;Accepted July 1, 2019;Published July 4, 2019
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DOIhttp://dx.doi.org/10.21511/imfi.16(2).2019.30
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Article InfoVolume 16 2019, Issue #2, pp. 355-369
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The paper examines the bias introduced by metaorder limit prices when measuring quality of execution services on financial market. While evaluating the quality of execution services, observed execution costs should be adjusted for metaorder participation rate, size and duration to ensure that they are comparable across execution service providers. One of the exogenous factors which may bias measured execution costs are the different metaorder limit prices in the sample. Currently, there are no proposed methods to normalize for this bias. In the research, the difference in execution costs for metaorders with different limit prices was examined by implementing a limit order book simulation model. It was discovered that the difference in metaorder limit prices is a source of significant heterogeneity in the execution cost distribution. However, we were able to prove that when market agents trade with constant intensities, the difference in execution costs for metaorders with different limit prices is fully explained by their realized participation rate. As a result, financial institution may assess quality of execution services for metaorders without any reservations about differences in metaorders limit prices as long as execution costs are adjusted for different participation rates.
- Keywords
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JEL Classification (Paper profile tab)G12, G17, C53
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References23
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Tables3
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Figures8
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- Figure 1. Initial shape of order book
- Figure 2. Examples of simulated price dynamics
- Figure 3. Examples of simulated price dynamics with metaorder traded every 10 time units
- Figure 4. Arrival cost distribution for various frequencies of metaorder trading
- Figure 5. Market impact as a function of metaorder participation rate
- Figure 6. Arrival cost distribution for various limit prices
- Figure 7. Arrival costs and probability of order to be fully filled
- Figure 8. Market impact for various speed of trading and limit prices
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- Table 1. Description of combined process transitions
- Table 2. Descriptive statistics for various frequencies (participation rates) of metaorder execution
- Table 3. Execution cost and trading stats for various metaorder limits
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Acknowledgment
Many thanks to Armida S. Alisjahbana, Roy H. Sembel, Budiono, Rahardi S. Rahmanto, and the anonymous referee/reviewer for valuable inputs and feedback. -
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