Optimal Execution Strategies Incorporating Internal Liquidity Through Market Making

ArXiv ID: 2501.07581 “View on arXiv”

Authors: Unknown

Abstract

This paper introduces a new algorithmic execution model that integrates interbank limit and market orders with internal liquidity generated through market making. Based on the Cartea et al.\cite{“cartea2015algorithmic”} framework, we incorporate market impact in interbank orders while excluding it for internal market-making transactions. Our model aims to optimize the balance between interbank and internal liquidity, reducing market impact and improving execution efficiency.

Keywords: Algorithmic execution, Market making, Interbank liquidity, Limit order book, Market impact

Complexity vs Empirical Score

• Math Complexity: 9.2/10
• Empirical Rigor: 2.5/10
• Quadrant: Lab Rats
• Why: The paper relies heavily on advanced stochastic control theory, including HJB QVIs and impulse control, with dense mathematical derivations. However, it presents a theoretical model with no empirical validation, backtesting, or implementation details, focusing entirely on mathematical formulation.

  flowchart TD
    A["Research Goal:<br>Optimize Execution Balancing<br>Interbank vs Internal Liquidity"] --> B["Methodology: Extend Cartea et al.<br>Model with Market Making &<br>Separate Market Impact"]
    B --> C["Inputs:<br>Limit Order Book Data<br>Order Flow Dynamics"]
    B --> D["Computational Process:<br>Stochastic Optimal Control<br>Hamilton-Jacobi-Bellman PDE"]
    C --> E
    D --> E["Simulation:<br>Optimal Strategy Execution<br>with Liquidity Constraints"]
    E --> F["Outcome 1:<br>Reduced Market Impact<br>via Internal Liquidity"]
    E --> G["Outcome 2:<br>Improved Execution Efficiency<br>& Cost Reduction"]
    E --> H["Outcome 3:<br>Enhanced Order<br>Book Management"]