Optimal Split of Orders Across Liquidity Pools: A Stochastic Algorithm Approach

Evolutions of the trading landscape lead to the capability to exchange the same financial instrument on different venues. Because of liquidity issues, the trading firms split large orders across several trading destinations to optimize their execution. To solve this problem we devised two stochastic recursive learning procedures which adjust the proportions of the order to be sent to the different venues, one based on an optimization principle and the other on some reinforcement ideas. Both procedures are investigated from a theoretical point of view: we prove a.s. convergence of the optimization algorithm under some light ergodic (or “averaging") assumption on the input data process. No Markov property is needed. When the inputs are independent and identically distributed we show that the convergence rate is ruled by a central limit theorem. A variant including some market impact effect is also proposed. Finally, the mutual performances of both algorithms are compared on simulated and real data with respect to an “oracle" strategy devised by an “insider" who a priori knows the executed quantities by all venues.