Abstract
Financial markets has witnessed an explosion of algorithmic trading strategy which can help traders especially involved in high-frequency trading efficiently reduce invisible transaction cost. The VWAP strategy usually used by traders can only decrease the cost of price impact by breaking block order into small pieces. However, the behavior of such order splitting may result in inevitable opportunity cost as well as price appreciation. This paper establishes a new algorithmic trading strategy to minimize total transaction costs including price impact, opportunity cost and price appreciation. The results show that the total transaction cost of this optimal trading strategy is lower than VWAP strategy.
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