Cross-Sectional Variation of Intraday Liquidity, Cross-Impact, and Their Effect on Portfolio Execution

Abstract

Over the past decade, there has been a significant rise in assets managed under passive and systematic strategies. Such strategies hold and trade portfolios in a coordinated manner, often concentrating trading around the end of the trading session. Simultaneously, there has been a rise in activity from market participants that act as liquidity providers, themselves trading along portfolio directions. In “Cross-Sectional Variation of Intraday Liquidity, cross-impact, and Their Effect on Portfolio Execution,” Min, Maglaras, and Moallemi investigate the implications of these two observations, specifically exploring how the phenomenon of portfolio liquidity provision leads to cross-security impact and influences the optimal execution schedules of risk-neutral traders that seek to minimize their expected execution costs. They show that the optimized schedules deviate from the naïve approach that trades each security separately and instead, couple the trading intensity across stocks so as to benefit from the liquidity provided along attractive portfolio trading directions. Empirical analysis demonstrates that coupled optimized schedules could lower costs by as much as 15% relative to the naïve approach.