Optimal posting price of limit orders: learning by trading

Sophie Laruelle (1) , Charles-Albert Lehalle (2) , Gilles Pagès (1)

1 LPMA - Laboratoire de Probabilités et Modèles Aléatoires
2 Head of Quantitative Research

Considering that a trader or a trading algorithm interacting with markets during continuous auctions can be modeled by an iterating procedure adjusting the price at which he posts orders at a given rhythm, this paper proposes a procedure minimizing his costs. We prove the a.s. convergence of the algorithm under assumptions on the cost function and give some practical criteria on model parameters to ensure that the conditions to use the algorithm are fulfilled (using notably the co-monotony principle). We illustrate our results with numerical experiments on both simulated data and using a financial market dataset.

Keywords: Stochastic approximation; compound Poisson process; co-monotony principle; market impact; limit order; order book; high-frequency optimal liquidation; statistical learning

Domains: Probability [math.PR]

Sophie Laruelle, Charles-Albert Lehalle, Gilles Pagès. Optimal posting price of limit orders: learning by trading. Mathematics and Financial Economics, 2013, 7 (3), pp.359-403. ⟨hal-00650314v2⟩