In this brilliant paper, the authors present a framework to perform optimal trading, taking into account market microstructure and a long-term trading schedule without the use of optimal control. This approach relies on the use of the generalized momenta p = ∇V(t,q) as the effective microstructure alpha. It is showed that a myopic agent sending only market orders with such alpha will minimize the error with respect to the long-term trading schedule and that, when the possibility of passive execution is added, the long-term alpha can be chosen as a transformation of the generalized momenta function. In addition, a general microstructure trading framework for the multi-asset multi-venue optimal trading problem is presented, thus showing that the effective microstructure alpha can be computed in closed form. Based on the dual formulation of the classic Almgren-Chriss optimization problem, it simplifies optimal trading problems that are usually intractable using optimal control due to the high-dimensional Hamilton-Jacobi-Bellman equation resulting from the control problem. This is of particular importance for a quantitative execution desk wishing to trade a high number of cross-listed assets.
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As an Investment Consultant and Specialist, Pompeo Pontone is a Professional Investor with 25 years’ experience in the fields of Investment Management and Quantitative Finance, with advanced expertise in Computer Science and Data Science.