Trading strategies of institutional investors in a limit order book market

Naiwei chen,Mingxu Peng

doi:10.1051/matecconf/20164402062

Abstract

The study aims to examine the trading strategies of institutional investors in limit order book market. The study modifies assumptions of prior studies [1,2] to match actual situations or facilitate calculations. First, to match actual situations or facilitate calculations. First, the investors’ objective in the study is profit maximization rather than minimization of trading costs. Second, time is continuous rather than discrete. Third, price impact functions are non-linear and take the quadratic form that features increasing prices. Study results indicate that institutional investors adopt the increasing trading strategy if the permanent price impact dominate whereas they adopt the decreasing trading strategy if the transient price impact dominates. In addition, the average trading strategy is adopted if and only if the permanent and transient price impacts are combined in some fixed proportions.

Highlights

Most research on traditional microstructure mainly focuses on the market-maker market
This means that when the permanent and transient price impacts are combined in some fixed proportions, institutional investors choose the average trading strategy
When the transient price impact dominates, investors will opt for slow trading to prevent from excessive disclosure of information, which is good for profit maximization

Summary

Introduction

Most research on traditional microstructure mainly focuses on the market-maker market. It is worthwhile to study such a system in the sense that study results will provide important theoretical and empirical implications for understanding and improving the microstructure of securities market in China characterized by the limit order book quotation system. The study aims to examine the trading strategies of institutional investors in the limit order book market. Study results indicate that investors adopt the strategy of increasing trading volume if the permanent price impact dominates. If and only if the permanent and transient price impact functions are combined in some fixed proportions, investors will adopt the average trading strategy. Such a conclusion is inconsistent with the findings of prior studies [1,2].

Hypotheses

Model and analysis

Conclusions