PT  - JOURNAL ARTICLE
AU  - Jeff Bacidore
AU  - Di Wu
AU  - Wenjie Xu
TI  - Balancing Execution Risk and Trading Cost in Portfolio Trading Algorithms
AID  - 10.3905/jot.2013.8.4.037
DP  - 2013 Sep 30
TA  - The Journal of Trading
PG  - 37--43
VI  - 8
IP  - 4
4099  - https://pm-research.com/content/8/4/37.short
4100  - https://pm-research.com/content/8/4/37.full
AB  - In this article, we discuss the balance between risk and cost in the context of portfolio trading algorithms. We provide examples of how trading a basket in a coordinated manner can lead to more efficient execution than trading each stock independently. Specifically, by trading buy and sell orders in a synchronized way, advanced algorithms can execute more passively, reducing cost without increasing risk. We discuss how this cost–risk trade-off can be achieved via an optimization approach, even when additional constraints such as cash- or beta-neutrality are applied. Finally, we address the importance of incorporating intraday variation in cost and risk when formulating an optimal algorithmic trading strategy.TOPICS: Quantitative methods, portfolio construction