Model Predictive Control For Trade Execution

2026-03-30

AI Summary

This study addresses the challenge of executing large orders in continuous double-auction markets under time and liquidity constraints. The authors propose a risk-constrained model predictive control (MPC) framework that dynamically optimizes trading decisions via quadratic programming while tracking benchmark schedules such as TWAP or VWAP. The approach permits strategic deviations from the benchmark to minimize expected execution cost, explicitly incorporating benchmark residual cost into the objective function to enable modular, data-driven deployment in live trading environments. Empirical evaluation using six months of NASDAQ Level 3 data demonstrates that the method reduces execution schedule gaps by 40–50% compared to cross-price benchmarks and significantly mitigates slippage. Performance improves further when integrated with price forecasts.

Abstract

We address the problem of executing large client orders in continuous double-auction markets under time and liquidity constraints. We propose a model predictive control (MPC) framework that balances three competing objectives: order completion, market impact, and opportunity cost. Our algorithm is guided by a trading schedule (such as time-weighted average price or volume-weighted average price) but allows for deviations to reduce the expected execution cost, with due regard to risk. Our MPC algorithm executes the order progressively, and at each decision step it solves a fast quadratic program that trades off expected transaction cost against schedule deviation, while incorporating a residual cost term derived from a simple base policy. Approximate schedule adherence is maintained through explicit bounds, while variance constraints on deviation provide direct risk control. The resulting system is modular, data-driven, and suitable for deployment in production trading infrastructure. Using six months of NASDAQ 'level 3' data and simulated orders, we show that our MPC approach reduces schedule shortfall by approximately 40-50% relative to spread-crossing benchmarks and achieves significant reductions in slippage. Moreover, augmenting the base policy with predictive price information further enhances performance, highlighting the framework's flexibility for integration with forecasting components.

Problem

• trade execution
• market impact
• opportunity cost
• liquidity constraints
• order completion

Innovation

• Model Predictive Control
• Trade Execution
• Market Impact
• Risk-Aware Optimization
• Data-Driven Trading