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Sunil Wahal – Arizona State University, W.P. Carey School of Business
12 April 2019 @ 9:30 am - 11:00 am
The Anatomy of Trading Algorithms
We study the anatomy of four non-bespoke institutional trading algorithms. Proprietary data show parent orders and the sequences of child submissions, fills, and cancellations that they generate. The sample consists of 2.3 million parent orders between 2012 and 2016 that represent $675 billion in demand. These parent orders generate almost 300 million child submissions that represent $2.1 trillion in notional volume which ultimately result in $388 billion in traded volume. Each algorithm encodes design features that exploit the market’s microstructure to achieve its objective. We estimate partial correlations between child-level fill rates and trading costs and a variety of hitherto unobservable microstructure choice variables. These correlations suggest that the complexity of electronic trading reflects nuances in the price, quantity, and time tradeoffs that are primitive to trading. The endogenous nature of these tradeoffs implies that one cannot recover structural parameters. However, we estimate bounds on the tradeoffs by estimating the opportunity costs of unfilled parent orders.