Algorithmic Trading for Online Portfolio Selection under Limited Market Liquidity

Ha, Youngmin and Zhang, Hai (2018) Algorithmic Trading for Online Portfolio Selection under Limited Market Liquidity. Preprint / Working Paper. University of Strathclyde, Glasgow.

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We propose an optimal intraday trading algorithm to reduce overall transaction costs through absorbing price shocks when an online portfolio selection (OPS) rebalances its portfolio. Having considered the real-time data of limit order books (LOB), the trading algorithm optimally splits a sizeable market order into a number of consecutive market orders to minimise the overall transaction costs, including both the market impact costs and the proportional transaction costs. The proposed trading algorithm, compatible to any OPS methods, optimises the number of intraday trades as well as finds an optimal intraday trading path. Backtesting results from the historical LOB data of NASDAQ-traded stocks show that the proposed trading algorithm significantly reduces the overall transaction costs in an environment of limited market liquidity.


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