Optimal Execution Tactics in Futures Markets

Abstract

We investigate optimal order execution tactics using various combinations of limit and market orders in US and European futures markets. In a similar way to Smart order routing in stocks, Smart order execution can noticeably reduce futures trading costs. This is important as in more frequent trading cases transaction costs can add up to 50 % of fund performance (Narang 2009). There is a lot of speculation and very little scientific research on what ‘algos’ (order execution tactics) can produce the smallest slippage. We fill this gap by doing a simulation study using 0.4 trillion tick sized real world data. We obtained the tick data from systematic trading firm and optimized various execution tactics aiming to minimize average slippage per contract. We uniformly generated trades and investigated the best tactics to execute them. Research conclude that the best tactic overall is the ‘limit then market’ tactic where we place a limit order on the last seen price, hold for t seconds and convert to market order. The transaction costs can be reduced up to 70% for some markets in comparison to the benchmark. In some specific illiquid markets like platinum and palladium, this method increases slippage. We note that different markets vary in terms of the best tactics to use and the methods we have discovered and may not hold for large orders as they may start to influence the market.