Man Group Develops New Model for Trading Cost Optimization

Man Group PLC, a global investment management firm, has published research introducing a novel approach to minimizing trading costs, particularly for sequential orders. The study, authored by Giuliana Bordigoni and Philipp Ustinov, focuses on optimizing the execution of two trades while accounting for transient price impact.

While existing research often focuses on optimizing the cost of a single trade, Man Group's new model aims to minimize the combined execution cost of two sequential metaorders. A key advancement is its ability to handle situations where the size and direction of the second metaorder are uncertain at the time the first one is initiated.

The research analyzes two cost functions. The first, termed "total separate costs," is a common industry practice where each metaorder is benchmarked against its initiation price. However, the study argues this method can significantly understate true trading costs and adversely affect order scheduling.

To address these shortcomings, Man Group proposes a new cost function. This approach splits the second metaorder into a predictable component and a residual component. These are then benchmarked against the initiation prices of the first and second metaorders, respectively. The study proves the existence of an optimal execution trajectory under specific conditions, such as linear price impact and positive definite decay.

This new model offers a more accurate way for investors to manage and minimize trading expenses, especially in complex and uncertain market conditions. Further details can be found in the full article and its summary available on Man Group's website.