do algorithmic executions leak information implementation shortfall with transitory price effects

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8DoAlgorithmicExecutionsLeakInformation?GeorgeSofianos,JuanJuanXiangGoldmanSachsEquityExecutionStratsAssetmanagersareconcernedthatthealgorithmstheyusetoexe-cutetheirordersmayleakinformationtopredators.Predatorsaretraderswhousethisi

2、nformationtotradeinthesamedirectionastheassetmanagers,increasingtheassetmanagerstradingcosts.Assetmanagersareparticularlyconcernedaboutleakinginformationtohigh-frequencytrading(HFT)predators.Inthischapter,wedevelopandempiricallytestaframeworkforevaluatingwhetheralg

3、orithmic(algo)executionsleakinforma-tion.BasedontheGoldmanSachsElectronicTrading(GSET)algoexecutionswetested,ourmainfindingisthatthesealgoexecutionsdonotleakinformationthatpredators,includingHFTpredators,canprofitablyexploit.Thealgoswetested,byslicinguplargehigh-Alph

4、aordersintosmallerordersandexecutingthemovertime,makeitexpensiveforpredatorstoidentifyandprofitablytradealongtheseorders.Inthenextsection,wedefineinformationleakageanddistinguishbetweengoodandbadinformationleakage.Wenextshowhowbadinformationleakageincreasesexecutions

5、hortfallandintroducetheBadMaxapproachfortestingwhetheralgosleakinformationtopredators.IntheBadMaxapproach,wepretendtobeBadMax,afictitiouspredator.AsBadMax,weusehistoricaldatatoback-testwhetherBadMaxcanconstructprofitablepredatorystrategies.Wenextdescribethehistorical

6、dataweuseinourback-testsandesti-matetheBadMaxgrossandnetAlphaforseveralBadMaxpredatorystrategies.Inourback-testsweassumethatBadMaxcansomehow159





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HIGH-FREQUENCYTRADINGFigure8.1Goodandbadinformationleakage(hypotheticalexample)Pric

7、eoverAlphaMaxexecutionhorizon(bp)GoodMaxsellsXYZ12108BadMax6buysXYZ4XYZpriceifAlphaMaxbuyexecutions2AlphaMaxdidnotbuydriveXYZpriceup00000000Open10h0011h0012h0013h0014h0015h00CloseAlphaMaxAlphaMaxAlphaMaxAlphaMaxAlphaMaxAlphaMaxbuys10Kbuys10Kbuys10Kbuys10Kbuys10Kbuy

8、s10KsharessharessharessharessharessharesFirstSecondThirdFourthFifthSixthtranchetranchetranchetranchetranchetrancheidentifyGSETbuyandsellalgoexecu