Order Execution Strategies

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Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Order execution strategies in finance, markets, and trading are used for minimizing costs, improving execution quality, and managing risk.

These strategies are important for both individual traders and institutional investors.

They involve various techniques and algorithms to execute trades efficiently by considering market conditions, volume, and price impact.


Key Takeaways – Order Execution Strategies

  • Order Execution Strategies List
    • Market Orders
    • Limit Orders
    • Volume Weighted Average Price (VWAP)
    • Time Weighted Average Price (TWAP)
    • Iceberg Orders
    • Hidden Orders
    • Algorithmic Trading Strategies
    • Pegged Orders
    • Stop Orders and Stop-Limit Orders
    • Direct Market Access (DMA)
    • Smart Order Routing (SOR)
    • Cancellation Orders
    • Trailing Stops
  • Use Limit Orders for Precision
    • Limit orders ensure trades execute at a specific price or better.
    • Offers control over execution price, which is important for managing entry and exit points strategically.
  • Algorithmic Efficiency
    • Algorithmic trading automates the execution of large orders. (Now offered at most brokers.)
    • Breaks orders into smaller, manageable sizes to minimize market impact and optimize trade execution.


Order Execution Strategies

Here’s an overview of some common order execution strategies:

Market Orders

This is the simplest execution strategy where orders are executed immediately at the current market price.

While execution is guaranteed, the price at which the order is executed may vary.

These can perform poorly in volatile markets.

Also, some traders object to their trades being used as part of payment for order flow (PFOF) practices, so market orders wouldn’t be the best for this purpose (we’d recommend sticking with limit orders in this case).

Limit Orders

Traders specify the maximum or minimum price at which they are willing to buy or sell.

This strategy ensures price control but doesn’t guarantee execution, as the market may not reach the specified price.

And also, it’s not necessarily the listed market price, but the bid-ask spread that matters most for understanding where orders are likely to trigger.

Volume Weighted Average Price (VWAP)

This strategy aims to execute an order at a volume-weighted average price throughout the trading day.

It’s used to minimize the market impact by distributing the trades across several periods to match the average market price.

This is often used for large institutional orders.

Time Weighted Average Price (TWAP)

Similar to VWAP, TWAP aims to execute orders at an average price over a specified time frame.

It reduces the market impact by distributing orders evenly over time, regardless of volume fluctuations.

VWAP is more popular overall, as most traders and institutions just want to minimize market impact – where trading volume has a big influence – rather than spread something over a fixed amount of time.

It depends, though.

For example, some executives may want to liquidate a fixed amount of stock per year.

In this case, TWAP might be better.

Iceberg Orders

Large orders are divided into smaller chunks to hide the actual order quantity from the market, which reduces the impact on the market price.

Only a portion of the order is visible to other market participants at any time.

Hidden Orders

These are similar to iceberg orders but hide all information except the minimum quantity the trader is willing to buy or sell.

Algorithmic Trading Strategies

These involve using more complex algorithms to execute orders based on predefined criteria such as timing, price, and volume to achieve the best possible execution.

Examples include the use of statistical models, machine learning techniques, and high-frequency trading algorithms.

Pegged Orders

These orders are adjusted automatically in response to changes in market conditions, pegging to parameters such as the best bid and offer, midpoint of the quoted spread, or another reference point.

Stop Orders and Stop-Limit Orders

These strategies are used to limit losses or protect profits.

A stop order sells a security when its price drops to a particular point.

A stop-limit order specifies two prices:

  • the stop price and
  • the limit price

This offers more control over the execution price.

Direct Market Access (DMA)

Traders and institutions use DMA to interact directly with the order book of an exchange, so it bypasses traditional brokers to achieve faster execution and reduced costs.

Smart Order Routing (SOR)

SOR systems automatically select the best execution venue from a range of options.

They consider factors such as price, liquidity, and speed to optimize trade execution.

Many brokers have SOR, such as Interactive Brokers.

Cancellation Orders

These orders are used to cancel existing market or limit orders before they’re filled.

Trailing Stops

These orders automatically adjust the stop price based on the security’s price movement, either trailing upwards to protect profits or downwards to limit losses.


Choice of Order Execution Strategy

The choice of strategy depends on various factors including:

Trading or Investment Goals

Depends on whether you’re seeking immediate execution, price control, or minimizing market impact.

Market Conditions

Factors like liquidity and volatility can influence strategy effectiveness.

Order Size

Larger orders often benefit from strategies like VWAP or TWAP to reduce market impact.

Trader Experience & Risk Tolerance

More complex strategies may require advanced knowledge and a higher risk tolerance.



Each order execution strategy has its advantages and trade-offs, and the choice of strategy depends on the specific goals, such as speed of execution, price improvement, or minimizing market impact.

Institutional traders/investors often employ a mix of these strategies by using more advanced algorithms and quantitative models.



Article Sources

  • https://www.cmri.or.th/uploads/images/CMRI_Publication/1662970685CMRI_An_Adaptive_Order_Execution_Strategy_for_VWAP_Tracking_Paper.pdf

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