Algorithmic Execution

How to get into and out of positions without moving the market against yourself.

Key Points

• Implementation shortfall (arrival price vs execution price) is the right metric for execution quality; comparing to VWAP is misleading
• For orders >5% of ADV, schedule over multiple days; market impact grows nonlinearly with size
• Iceberg orders hide size but signal intent to informed participants; use only in less-watched instruments
• Limit orders earn the spread but incur adverse selection; market orders pay the spread but guarantee execution
• The square-root law of market impact: impact ∝ sqrt(size / ADV × σ² × time)
• For illiquid instruments, negotiate a block trade with a dealer; the price improvement usually exceeds any algo execution

Strategies

Adaptive VWAP

Adjust the historical intraday volume curve based on recent realized volume. Skew execution toward the front of the day if informed flow is suspected.

Liquidity Seeking

Start with a passive posting at the inside, escalate to taking liquidity if not filled within X seconds. Cap participation rate at 5–10% of volume.

Tools & Resources

• Almgren-Chriss optimal execution model — Theoretical baseline
• BestEx Research — Independent execution algo analytics
• ITG / Virtu algorithms — Institutional execution algos