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Alec Schmidt

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133
Date
2022/10/31
ML Score
5
Job
Financial Risk and Engineering, NYU School of Engineering | Adjunct Professor
Content
In a recent article (Costly Trading, https://lnkd.in/e-sDZWK9) Michael Isichenko discusses optimal #execution of a #portfolio with non-stochastic #alpha, quadratic #risk aversion and linear #costs.He maximizes mean-variance utility functional using appealing physical analogy of forced motion in the presence of friction, which makes it an enjoyable reading explaining the fundamentals of trading where alpha is comparable to #slippage. One of important conclusions of this paper is the existence of a no-trading zone (NTZ) with width scaling as a square root of cost. NTZ was also observed in a stochastic setting, with a scaling exponent of 1/3 (see, e.g., Optimal Trading with Linear Costs by Joachim de Lataillade, Cyril Deremble, Marc Potters, jean-philippe bouchaud, https://lnkd.in/etReefz3). Note that #impact cost disappears in the limit of a vanishing trading rate and thus does not impose an NTZ.Together with Olivier Guéant and Philippe Bergault, we have recently discussed a pure internalization zone in the context of #fx #marketmaking within #stochastic #control framework (Market-making by a foreign exchange dealer, https://lnkd.in/eMEsaQT4, https://lnkd.in/dzZgwZHQ). Although there is no alpha in our setting, the dealer has two trading pathways - #internalization (where he offers bid and offer prices to clients) and #externalization (where he trades in the open market). So there is a natural interplay between the uncertainty of making the #spread (and the associated #price risk) and the cost of #riskmanagment by trading (impact and slippage). When the #inventory is low, the dealer has no need to bear the cost of trading in the open market as he can manage risk by #skewing bid and offer. Increased inventory forces the dealer to #hedge externally. Reminiscent of NTZ in optimal portfolio trading, isn't it? There are differences of course, and the effect of market impact
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Integromat
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