Dynamic trade execution: a grammatical evolution approach. (1st January 2011)

• Record Type: Journal Article
• Authors: Cui, Wei; Brabazon, Anthony; O'Neill, Michael
• Is Part Of: International journal of financial markets and derivatives. Volume 2:Number 1/2(2011)
• Page Start: 4
• Page End: 31
• Publication Date: 2011-01-01
• Subjects: algorithmic trading -- AT -- trade execution -- artificial stock market -- evolutionary computation -- EC -- grammatical evolution -- GE -- financial markets; Derivative securities -- Mathematical models -- Periodicals; Capital market -- Periodicals; 332.605
• DOI: 10.1504/IJFMD.2011.038526
• Languages: English
• ISSNs: 1756-7130

Abstract

Trade execution is concerned with the actual mechanics of buying or selling the desired amount of a financial instrument. Investors wishing to execute large orders face a tradeoff between market impact and opportunity cost. Trade execution strategies are designed to balance out these costs, thereby minimising total trading cost. Despite the importance of optimising the trade execution process, this is difficult to do in practice due to the dynamic nature of markets and due to our imperfect understanding of them. In this paper, we adopt a novel approach, combining an evolutionary methodology whereby we evolve high-quality trade execution strategies, with an agent-based artificial stock market, wherein the evolved strategies are tested. The evolved strategies are found to outperform a series of benchmark strategies and several avenues are suggested for future work.