Paper: arXiv 2501.07581

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.

Complexity vs Empirical Score

  • Math Complexity: 9.2/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: 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.

Research Flowchart

  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"]