Optimal Liquidity Trading
Coauthor(s): Werner Stanzl.
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A liquidity trader wishes to trade a ?xed number of shares within a certain time horizon and
to minimize the mean and variance of the costs of trading. Explicit formulas for the optimal
trading strategies show that risk-averse liquidity traders reduce their order sizes over time and
execute a higher fraction of their total trading volume in early periods when price volatility
or liquidity increases. In the presence of transaction fees, numerical simulations suggest that
traders want to trade more frequently when price volatility goes up or liquidity declines. In the
multi-asset case, price effects across assets have a substantial impact on trading behavior, as
does continuous-time trading.
Source: Review of Finance
Huberman, Gur, and Werner Stanzl. "Optimal Liquidity Trading." Review of Finance 9, no. 2 (2005): 165-200.