  The composition of natural liquidity has been changing over time. An analysis
of intraday volumes for the S&P500 constituent stocks illustrates that (i)
volume surprises, i.e., deviations from their respective forecasts, are
correlated across stocks, and (ii) this correlation increases during the last
few hours of the trading session. These observations could be attributed, in
part, to the prevalence of portfolio trading activity that is implicit in the
growth of ETF, passive and systematic investment strategies; and, to the
increased trading intensity of such strategies towards the end of the trading
session, e.g., due to execution of mutual fund inflows/outflows that are
benchmarked to the closing price on each day. In this paper, we investigate the
consequences of such portfolio liquidity on price impact and portfolio
execution. We derive a linear cross-asset market impact from a stylized model
that explicitly captures the fact that a certain fraction of natural liquidity
providers only trade portfolios of stocks whenever they choose to execute. We
find that due to cross-impact and its intraday variation, it is optimal for a
risk-neutral, cost minimizing liquidator to execute a portfolio of orders in a
coupled manner, as opposed to a separable VWAP-like execution that is often
assumed. The optimal schedule couples the execution of the various orders so as
to be able to take advantage of increased portfolio liquidity towards the end
of the day. A worst case analysis shows that the potential cost reduction from
this optimized execution schedule over the separable approach can be as high as
6% for plausible model parameters. Finally, we discuss how to estimate
cross-sectional price impact if one had a dataset of realized portfolio
transaction records that exploits the low-rank structure of its coefficient
matrix suggested by our analysis.
