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Say Bob wants to buy \$30 million worth of APPL stock at a price of \$130.

He decides to use a limit order.

But posting a $30 million limit order would drive the price up and prevent him from being filled.

Obviously he must post only a fraction of this amount and then slowly top it up each time he gets filled. But what fraction? Should he post \$1 million? \$1000? or even \$10?

What variables decide what size or amount of \$ he should post? Surely there must exist an optimal amount, but what is it?

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  • $\begingroup$ "How does a trader choose how to size his limit order?" - the trader picks an execution algo they like and leaves it to the algo or gives it to a broker who does the same. $\endgroup$
    – user42108
    Feb 4 '21 at 16:24
  • $\begingroup$ Yes @user42108 but how does the algo decide how finely to split the large order? $\endgroup$
    – Fortranner
    Nov 1 '21 at 19:37
  • $\begingroup$ You could read materials from an algo provider to get some ideas. E.g. Quantitative Brokers (no affiliation). $\endgroup$
    – user42108
    Nov 2 '21 at 19:51
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Today 99% of these orders are executed by algos. All of the main brokers offer a suite of these tools to their trader. Here's an example of one such strategy offered by CS: https://plus.credit-suisse.com/r/V7oShS2AN-ZQ55.html

The modern market trades in 100 (or fewer) share increments. There's no practical way that a trader could manually work a large order piece by piece.

Instead the trader figures out how he wants to balance the trade-off between imediacy of execution and decay of alpha. Once he has a handle on that he picks the algo that he thinks is most appropriate. Then he sends the order off to whatever dealer/algo he likes the best.

The algo then will chip away at the order according to it's parameters.

You can see BAML's offerings here as well: https://business.bofa.com/en-us/content/high-touch-electronic-trading.html

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Here are some alternatives:

  1. Utilize Accumulate Distribute algorithm to reduce market impact.
  2. Place an iceberg order.
  3. Place a LOC (limit on close) order to execute it at the closing cross.
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  • $\begingroup$ I am aware of these. What I want to know is the intricacies on how a trader chooses which. More specifically for a limit order, how does he choose what size to reveal to the market. $\endgroup$ Feb 3 '21 at 12:29
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    $\begingroup$ The minimum recommended size is the round lot, so $13K in your example, to take full advantage of the order protection rule. Other inputs into algo settings include the average daily volume, the total order size, and how fast you want the order filled. $\endgroup$ Feb 3 '21 at 12:52

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