Estimate and compare liquidation costs across stocks
Retrieve the market impact data from the KRG FTP site. Connect to the FTP site using the
ftp function with a user name and password. Navigate to the
MI_Parameters folder and retrieve the market impact data in the
the encrypted market impact date, code, and parameters.
f = ftp('ftp.kissellresearch.com','username','pwd'); mget(f,'MI_Encrypted_Parameters.csv'); miData = readtable('MI_Encrypted_Parameters.csv','delimiter', ... ',','ReadRowNames',false,'ReadVariableNames',true);
Create a Kissell Research Group transaction
cost analysis object
k = krg(miData);
Load the example data from the file
KRGExampleData.mat, which is
included with the Datafeed Toolbox™.
appears in the MATLAB® workspace.
TradeData contains these
Average daily volume
For a description of the example data, see Kissell Research Group Data Sets.
Determine liquidity factor
lf for each stock using the
Kissell Research Group transaction cost analysis
k. Display the first
three liquidity factor values.
lf = liquidityFactor(k,TradeData); lf(1:3)
ans = 0.30 2.37 0.35
lf returns the ratios for
stock comparison due to liquidity demands.
The Liquidity Factor (LF) is a stock-specific measure of price sensitivity to investment dollars.
LF provides investors with a fair and consistent comparison of expected liquidation costs across stocks. LF incorporates stock-specific information to determine its sensitivity to order flow and investment dollars. The LF metric shows the ratio of liquidation costs due to liquidity demand by stock for an equal investment value in each stock. Market impact relies on the order size or shares traded which vary from order to order. LF provides an apples-to-apples comparison across financial instruments. Consider a stock I that has an LF = 0.10 and a stock II that has an LF = 0.20. Stock II is twice as expensive to transact for an equal dollar value. An investor buys or sells $1 million dollars of stock in stock I and stock II utilizing the same execution strategy. The cost of stock II is twice as large as stock I. The LF metric incorporates stock liquidity, volatility, and price to determine the LF trading cost parameter.
The LF model is
is price volatility. ADV is the average daily volume of the stock. Price is the current stock price in local currency. , , , and are the model parameters.
Price sensitivity to order flow
Order size shape
For details about the formula and calculations, contact the Kissell Research Group.
You can expand the LF model to include a stock-specific factor such as market capitalization, beta, P/E ratio, and Debt/Equity ratio. In this case, denotes the stock-specific factor and denotes the corresponding shape parameter. For details about implementing an expanded LF model, contact the Kissell Research Group.
 Kissell, Robert. “A Practical Framework for Transaction Cost Analysis.” Journal of Trading. Vol. 3, Number 2, Summer 2008, pp. 29–37.
 Kissell, Robert. “Algorithmic Trading Strategies.” Ph.D. Thesis. Fordham University, May 2006.
 Kissell, Robert. “TCA in the Investment Process: An Overview.” Journal of Index Investing. Vol. 2, Number 1, Summer 2011, pp. 60–64.
 Kissell, Robert. The Science of Algorithmic Trading and Portfolio Management. Cambridge, MA: Elsevier/Academic Press, 2013.
 Kissell, Robert, and Morton Glantz. Optimal Trading Strategies. New York, NY: AMACOM, Inc., 2003.