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Article

Optimal Participation and Short-Term Alpha

Mark Gurliacci, David Jeria and George Sofianos
Trading Spring 2010, 2010 (1) 78-85
Mark Gurliacci
is a vice president at Goldman Sachs Electronic Trading Strategies in Jersey City, NJ. mark.gurliacci@gs.com
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David Jeria
is an associate at Goldman Sachs Electronic Trading Strategies in Jersey City, NJ. david.jeria@gs.com
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George Sofianos
is a vice president at Goldman Sachs Electronic Trading Strategies in Jersey City, NJ. george.sofianos@gs.com
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Abstract

One of the most important decisions a trader has to make is how aggressively to execute. The right execution aggressiveness depends critically on short-term alpha. This article uses the Goldman Sachs trading cost model to derive the trader's optimal execution aggressiveness for different short-term alpha estimates. In this analysis, the trader optimizes execution aggressiveness by choosing the participation rate that minimizes execution shortfall. Shortfall has two components: liquidity impact and alpha loss. Increasing the participation rate speeds up executions and reduces alpha loss but increases impact. The optimal participation rate balances the reduced alpha loss of faster executions against the higher impact. For large-cap stocks and orders (2% of a day's volume, for example), when the expected alpha-to-close is 20 bps, the optimal participation is 7%.

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Trading: 2010 (1)
Guide to Global Liquidity II
Vol. 2010, Issue 1
Spring 2010
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Optimal Participation and Short-Term Alpha
Mark Gurliacci, David Jeria, George Sofianos
Trading Mar 2010, 2010 (1) 78-85;

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Optimal Participation and Short-Term Alpha
Mark Gurliacci, David Jeria, George Sofianos
Trading Mar 2010, 2010 (1) 78-85;
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  • Article
    • Abstract
    • ESTIMATING THE OPTIMAL PARTICIPATION RATE
    • CORNER SOLUTIONS AND MULTIDAY EXECUTIONS
    • ALPHA LOSS AND EXECUTION RISK
    • ESTIMATING THE ALPHA LOSS
    • CONCLUSION
    • Disclaimer
    • Appendix
    • ENDNOTES
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More in this TOC Section

  • Managing Liquidity: The OEMS Debate
  • In Search of a Better Market
  • Foreword
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