Analysis of Execution Methods in U.S. and European Futures

Abstract

Order execution methods using various combinations of limit and market orders in U.S. and European futures markets are investigated in this article. Similar to smart order routing in stocks, smart order execution can noticeably reduce futures trading costs. This is important because, in more frequent trading cases, transaction costs can add up to 50% of fund performance. There is much speculation and very little scientific research on whether algos (order execution tactics/methods) can produce the smallest slippage. We try to fill this gap in the literature by doing a simulation study using 0.4 trillion ticksized real world data. We obtained the tick data from a systematic trading firm and simulated various execution tactics aiming to reduce average slippage per contract. We generated trades uniformly and investigated the best tactics to execute them. The research concludes that the best tactic overall is the limit then market tactic, in which we place a limit order on the last seen price, hold fort seconds, and then convert to market order. Transaction costs can be reduced up to 70% for some markets in comparison to the benchmark. In some specific illiquid markets like platinum and palladium, however, this method increases slippage. We note that different markets vary in terms of the best tactics to use, and the methods we have discovered may not hold for large orders, as these orders may start to infl uence the market.

TOPICS: Futures and forward contracts, big data/machine learning