Abstract
The purpose of this paper is to examine whether the closing price guaranteed execution is possible contract, and if possible, how an institutional investor who affects the security price allocates execution volumes to both traditional trading and off-exchange (over-the-counter, OTC) trading venues. With a generalized price model at the traditional venue which considers the permanent impact effect explicitly, we derive an optimal execution strategy in the traditional trading venue and the allocation of the order volume to both venues in the framework of dynamic programming. By proving that an optimal execution strategy is in the static class, we further show that the closing price guaranteed contract may be established and the trading volume at the time of agreement of the contract can be controlled. Moreover, by some numerical examples, we illustrate a possibility for the institutional investor to manipulate the market in order to seek a profit under some trading situation.
Highlights
In recent years, as the increase of trading opportunities as the stock trading “venue,” it has been diversified the ways of trading for the institutional investors who execute a large amount of their order
By proving that an optimal execution strategy is in the static class, we further show that the closing price guaranteed contract may be established and the trading volume at the time of agreement of the contract can be controlled
We set the large trader makes a contract with a broker to be guaranteed her execution at the closing price on the intraday trading before she submits her order to the exchange
Summary
As the increase of trading opportunities as the stock trading “venue,” it has been diversified the ways of trading for the institutional investors who execute a large amount of their order. An institutional investor, referred to as the large trader, has to take into account of market impacts because of the liquidity of supply and demand at the stock exchange. She must consider the risk of price shift up. If someone who wants to sell a large amount, it is necessary to take into account the risk of price down This type of problem has been tackled by many researchers and practitioners so far. When the large trader adopts her executions at an off-exchange trading venue, especially, internal crossing with a broker, it is necessary to obtain some consents with the counter-party about the execution date (time), price, and volume. The VWAP guaranteed execution problem is often treated in a static framework
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