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Probability and Computational Finance Seminar
Qinghua Li
Humboldt University - Berlin
Title: Optimal Trading in a Two-Sided Limit Order Book

Abstract: This paper solves an optimal trading problem faced by a professional trader, in a realistic two-sided limit order book whose dynamics are driven by the order book events. The identity of the trader can be either a hedge fund or a brokery agency. The speed and cost of trading can be balanced by properly choosing active strategies on the displayed orders in the book and passive strategies on the hidden orders within the spread. We shall show the equivalence between trading and price switching, hence the best expected performance over a wide set of candidate trading strategies can be achieved within a set of price switching strategies. The optimal price switching strategy exists and is expressed in terms of the value function. A parallelizable algorithm to numerically compute the value function and optimal price switching strategy for the discretized state process is provided.

Co-authored with Ulrich Horst and Charles-Albert Lehalle. Preprint available at

Date: Monday, October 14, 2013
Time: 5:00 pm
Location: Wean Hall 6423
Submitted by:  Steve Shreve