Optimal Trading with Linear and (small) Non-Linear Costs

We reconsider the problem of optimal trading in the presence of linear and quadratic costs, for arbitrary linear costs but in the limit where quadratic costs are small. Using matched asymptotic expansion techniques, we find that the trading speed vanishes inside a band that is narrower than in the absence of quadratic costs, by an amount that scales as the one-third power of quadratic costs. Outside of the band, we find three regimes: a small boundary layer where the velocity vanishes linearly w...