Order Remainder Risk is the specific risk that a submitted trading order, particularly one of significant size, will not be fully executed at the desired price or within a specified timeframe, leaving an unfulfilled portion. This risk is especially relevant in illiquid or highly volatile markets, such as certain cryptocurrency asset pairs, where order books can be shallow.
Mechanism
This risk arises from insufficient liquidity at the desired price level, rapid market movements that cause the price to move beyond the order’s limit, or the sheer magnitude of the order exceeding available market depth. The unexecuted portion remains in the order book, exposed to further market fluctuations and potential adverse price changes.
Methodology
The methodology involves segmenting large orders into smaller, more manageable child orders (order slicing) and employing algorithmic execution strategies like Volume-Weighted Average Price (VWAP) or Time-Weighted Average Price (TWAP) to distribute execution over time. This approach aims to minimize the probability of leaving a significant order portion exposed to adverse price movements by adapting dynamically to available market liquidity.
Dark pools mitigate order remainder risk by enabling anonymous, large-scale trade execution, thus preventing the information leakage that drives adverse price movements.
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