Estimating Volume Limits & Trading Capacity
Posted: Fri May 02, 2008 11:07 am
A salient issue in system development is the twin issue of realistic volume limits and trading capacity; that is:
1. How much volume can you trade in a particular market and
2. Given the above for each of the markets in your portfolio what is the maximum asset capacity for your trading strategy.
These two issues are of course heavily impacted by market venue (pit or electronic exchange) and market order type.
For the course of this discussion lets consider the following assumptions:
1. Order Type: Limit Orders only
2. Market Venue: Electronic exchanges/Interbank FX
3. Trading Times: all markets trade for 22-24 hours a day/5 days a week
4. Markets: Electronic Indices, major FX pairs, Interest Rate Futures, Crude Oil, Gold,
Ideally we should have:
A. VOLUME LIMIT (VL) = A percentage of average daily volume and
B. TRADING CAPACITY (TC) = derived from VL and your money management algorithm. Let's use a simple money mgmt algo where you limit your margin usage to 20% of account equity (MER).
In this case TC = Sum of VL * Average Daily Volume * Margin for each market divided by MER
My thoughts are VL should be no more than 1% of average daily volume.
What are your thoughts on this issue?
What’s the ideal/most realistic VL estimate?
What other methods exist to estimate market impact and volume limits?
Lets have an intense, focused and insightful debate on this important issue.
Many Thanks.
1. How much volume can you trade in a particular market and
2. Given the above for each of the markets in your portfolio what is the maximum asset capacity for your trading strategy.
These two issues are of course heavily impacted by market venue (pit or electronic exchange) and market order type.
For the course of this discussion lets consider the following assumptions:
1. Order Type: Limit Orders only
2. Market Venue: Electronic exchanges/Interbank FX
3. Trading Times: all markets trade for 22-24 hours a day/5 days a week
4. Markets: Electronic Indices, major FX pairs, Interest Rate Futures, Crude Oil, Gold,
Ideally we should have:
A. VOLUME LIMIT (VL) = A percentage of average daily volume and
B. TRADING CAPACITY (TC) = derived from VL and your money management algorithm. Let's use a simple money mgmt algo where you limit your margin usage to 20% of account equity (MER).
In this case TC = Sum of VL * Average Daily Volume * Margin for each market divided by MER
My thoughts are VL should be no more than 1% of average daily volume.
What are your thoughts on this issue?
What’s the ideal/most realistic VL estimate?
What other methods exist to estimate market impact and volume limits?
Lets have an intense, focused and insightful debate on this important issue.
Many Thanks.