medium · Market Microstructure market-impact
If a trader's objective is to minimize total execution costs E[IS] + λ Var(IS), and they observe that market volatility is rising sharply while volume remains stable, the optimal participation rate should typically:
- Remain constant to satisfy the square-root model
- Decrease to avoid detection by parasitic traders
- Increase to reduce exposure to price risk
- Decrease to minimize the higher impact costs
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