Using Fourier Transform to Detect Large Orders: Part 1

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In the last two decades, advancements in information technology have contributed in the creation of virtual marketplaces where buyers and sellers are brought together through an electronic trading platform. Electronic trading is rapidly replacing human trading in global securities markets. Therefore, human best-execution practice has naturally evolved into automated execution algorithms.

Algorithmic execution refers to a set of computer methodologies used to determine the optimal way to parcel and execute an order. The aim of execution algorithms is to minimize price impact, execution costs and visibility while maximizing trade speed and size. In particular, they are essential when handling large orders. In fact, if a large order is simply posted to the market, it will cause a strong and adverse price impact, and since bid/ask quantity tend to decrease going further from best bid/ask quotes, that will significantly deteriorate the execution price.

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