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Optimal Market Making in the Presence of Latency
- Publication Year :
- 2018
- Publisher :
- arXiv, 2018.
-
Abstract
- This paper studies optimal market making for large-tick assets in the presence of latency. We consider a random walk model for the asset price, and formulate the market maker's optimization problem using Markov Decision Processes (MDP). We characterize the value of an order and show that it plays the role of one-period reward in the MDP model. Based on this characterization, we provide explicit criteria for assessing the profitability of market making when there is latency. Under our model, we show that a market maker can earn a positive expected profit if there are sufficient uninformed market orders hitting the market maker's limit orders compared with the rate of price jumps, and the trading horizon is sufficiently long. In addition, our theoretical and numerical results suggest that latency can be an additional source of risk and latency impacts negatively the performance of market makers.
- Subjects :
- Mathematical optimization
Quantitative Finance - Trading and Market Microstructure
050208 finance
Optimization problem
Computer science
05 social sciences
Random walk
Market maker
Trading and Market Microstructure (q-fin.TR)
FOS: Economics and business
ComputerApplications_MISCELLANEOUS
0502 economics and business
Markov decision process
Asset (economics)
050207 economics
Latency (engineering)
General Economics, Econometrics and Finance
Finance
Subjects
Details
- Database :
- OpenAIRE
- Accession number :
- edsair.doi.dedup.....59eaff2eb24691d6eb1e1c1e1e819f32
- Full Text :
- https://doi.org/10.48550/arxiv.1806.05849