Fast or Slow : Optimal Trading Strategies with Speed-Dependent Transaction Cost

The effective transaction cost rates (TCRs) facing large institutional investors often depend on their trading speeds. We propose a continuous time work-horse model to study optimal trading strategies with speed-dependent TCRs. Unlike the existing literature, our model allows the TCRs to be a general function of trading speeds. We apply our framework to the optimal portfolio rebalancing problem and the optimal liquidation/acquisition problem of financial institutions. Our model implies the commonly observed order-shredding strategy and U-shaped trading speeds against time. We show that adopting some naive trading strategies can be economically costly