Research On Optimal Trading Strategies Based On The Dynamic Characteristics Of Limit Order Book

In a stock market,institutional investors or delegated traders adopt execution trading strategies to reduce the transaction costs incurred when trading large orders.Transaction cost is the sum of fees paid by investors in the entire trading process,and its size is depended on the characteristics of the market,the choice of trading strategy and the specific execution.Market price impact cost and market timing opportunity cost are important components of transaction cost.When dealing with a large order transaction,the trading strategy requires that large order be split and then traded in batches to reduce the cost of price impact arising from trading.When dealing with a small order transaction,the trading strategy focuses more on reducing the timing opportunity cost of the trading.It is of great theoretical and practical significance for institutional investors and the securities market to carry out the research on execution trading strategies which conform to the characteristics of the markets.On the basis of the dynamic characteristics of limit order book market,this paper studies the optimal execution problem with the form of market order,and the optimal placement problem with the form of limit order.This paper proposes the corresponding optimal trading strategy in order to reduce market price impact cost and market timing opportunity cost,and achieves the expected results finally.The main research contents and contributions of this paper are summarized as follows:1.Study the characteristics of order arrival rates in limit order book market.The dynamic characteristics of limit order book market are characterized by market liquidity and market volatility.Market resilience is an important factor of order driven market liquidity.The strength of market resilience and market liquidity depends on the rates at which different forms of orders arrive in the limit order book,known as the order arrival rates.The research on the characteristics of different forms of order arrival rates is the premise for us to deeply understand the dynamic evolution process of limit order book,and also the premise for us to carry out the research on the optimal execution problem based on market dynamic supply and demand.On the basis of previous research,this paper assumes that arriving orders follow independent Poisson process,and then improves the statistical method of order arrival rates,taking the best price in the same direction after the last trading as the benchmark price.According to the benchmark price and improved statistical method,the arrival rates of limit orders,cancellations and market orders outside and inside the bid-ask spread are counted and analysis,with the high-frequency trading data set in the US stock market captured by LOBSTER engine.The power functions are used to fit different forms of order arrival rates,and parameter estimates are obtained by OLS estimation.This paper is the first to calculate the order arrival rates inside the arrival bid-ask spread.The empirical results show that the profile of the order arrival rates is closer to the power function than that outside the bid-ask spread.This conclusion fills the gap in relevant research fields at home and abroad.2.Propose an optimal execution strategy based on hump-shaped market depth,and an optimal execution strategy based on mean-variance model.According to the improved benchmark price,this paper calculates the size of each order queue in the limit order book under unconditional expectation,and obtains the real hump-shaped market depth.Then,the dynamic evolution process of the limit order book with humpshaped market depth is studied when a series of small orders(market order form)are traded continuously.Based on these,the mathematical model of optimal execution problem is established,and the analytical solution and corresponding trading strategy are obtained by using dynamic programming.Then,the key steps in the above process are retained,a market depth with general shape is proposed,the specific function form is diluted,the mathematical model is established,the analytical solution and trading strategy are obtained again by using dynamic programming.A risk control mechanism is added on the above model,and an optimal execution trading strategy based on the mean-variance model is proposed,which focuses on the balance between risk and cost,minimizes the trading variance and takes into account the expected trading cost.Finally,the effective frontier of the optimal solution of trading strategy is obtained.The results show that under the condition of trading risk,the optimal solution of the balance between expectation cost and risk can be obtained by means of decreasing transaction.3.Propose an optimal placement strategy based on limit order book market.The key to solving the optimal placement problem is to calculate the probability the placed limit order will be traded.In a limit order book market,the price of limit order must be better than the price of market order at the same time and in the same direction.If the former can complete the trading,then the transaction cost incurred must be better than the latter.However,according to the definition and attributes of limit order and market order,the submitted market order will definitely complete the transaction,while the submitted limit order will not.The latter requires a probability,and may even fail to be completed all the time with an execution risk.This paper assumes that the order queue where the limit order is placed is a birth-death process,and calculates the probability of the limit order placed on the bid side being traded by means of Laplace transform.The empirical results show that under the condition of given order arrival rate,time and other parameters,the probability is related to the size of the order queue,which is a monotonically decreasing function of the size of the order queue.Based on these,an optimal placement strategy is proposed to submit orders in the form of a combination of limit order and market orde.The results show that the total transaction cost under the optimal placement strategy is improved compared to the optimal execution strategy that only uses market orders.4.Propose an optimal placement strategy for a small order based on limit order book market.When trading a small order,there is no need to split the order because of the small price impact,and the transaction cost mainly comes from market timing opportunity cost.This paper discusses the optimal execution of small orders in the form of market order by using optimal stoppping problem first,and then calculates the probability that the limit order placed at each price on the bid side being traded.Based on these,this paper studies the optimal placement problem for a small order in the form of limit order.The results show that the trading strategy that submits order in the form of limit order can obtain higher probability of being traded and lower transaction cost.