Optimal Order Execution in Intraday Markets: Minimizing Costs in Trade Trajectories

Abstract

Optimal execution, i.e., the determination of the most cost-effective way to trade volumes in continuous trading sessions, has been a topic of interest in the equity trading world for years.Electricity intraday trading slowly follows this trend but is far from being well-researched.The underlying problem is a very complex one. Energy traders, producers, and electricity wholesale companies receive various position updates from customer businesses, renewable energy production, or plant outages and need to trade these positions in intraday markets.They have a variety of options when it comes to position sizing or timing. Is it better to trade all amounts at once? Should they split orders into smaller pieces? Taking the German continuous hourly intraday market as an example, this paper derives an appropriate model for electricity trading. We present our results from an out-of-sample study and differentiate between simple benchmark models and our more refined optimization approach that takes into account order book depth, time to delivery, and different trading regimes like XBID (Cross-Border Intraday Project) trading. Our paper is highly relevant as it contributes further insight into the academic discussion of algorithmic execution in continuous intraday markets and serves as an orientation for practitioners. Our initial results suggest that optimal execution strategies have a considerable monetary impact.

Simulation-based Forecasting for Intraday Power Markets: Modelling Fundamental Drivers for Location, Shape and Scale of the Price Distribution

“…Path-based forecasts allow to price short-term asset flexibility using Monte-Carlo option valuation. Additionally, the explicit modelling of the volatility provides a starting point to introduce time-varying volatility to stochastic optimization models for market making, position solving and sequential bidding (von Luckner et al, 2017;Glas et al, 2020;Aïd et al, 2016;Kath and Ziel, 2020;Kraft et al, 2023).…”

Optimal bidding in hourly and quarter-hourly electricity price auctions: trading large volumes of power with market impact and transaction costs

“…To the best of our knowledge, the problem of portfolio optimization in auction-based spot markets with market impact and trading costs has not been addressed in the literature so far. Kath and Ziel [13] investigate the optimal order execution in the intraday continuous market accounting for the market impact. The work that is the closest to our setting is the paper of Ayón et al [14] who investigate the optimal bidding curves in day-ahead and intraday electricity markets.…”