Deltix Advanced Execution Analysis (AXA) Research
Can Passive Orders Reduce Transaction Costs?
Recently, we completed an order execution study in conjunction with Marex Spectron. We examined different methods of executing orders for six metals on the London Metal Exchange (LME) to see whether increasing passivity can improve transaction cost versus a market order.
We tested 4 types of limit orders:
- Limit-Primary
- Limit-MidPrice
- Pegged-Primary
- Pegged-MidPrice
(Source: Marex, Deltix, LME)
Defining risk as the standard deviation of transaction costs, we found that:
- Across all evaluated strategies, the Market order execution method has the highest expected transaction cost and the lowest risk associated with it.
- For pegged orders, when using peg intervals of short duration (up to 30-60 seconds depending on the market), the Pegged-MidPrice execution method provides both lower expected transaction costs and risk compared to the Pegged-Primary execution method.
- Only Pegged-Primary (and not Pegged-MidPrice) demonstrates steady improvement of the transaction cost when using peg intervals of longer duration (above 60 seconds). However, this improvement comes at the cost of additional risk.
Click here to download the 14-page research report that includes details about the study approach, results achieved for each data set, our conclusions and recommendations for further research.
