Related papers: How much market making does a market need?
One of the problems faced by a firm that sells certain commodities is to determine the number of products that it must supply in order to maximize its profit. In this article, the authors give an answer to this problem of economic interest.…
We propose a model for a market which structure is of the tree form. Each branch of the tree is composed by identical firms, its root (the branch of the first level) is formed by the firms producing raw material, and the branches of the…
We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and {\it vanishes} around the current price. This result is generic, and only relies on mild assumptions about the order flow…
We study a discrete-time financial market with a single constrained trader, competitive market makers, and noise traders. Within the class of linear equilibria, the equilibrium structure is shown to be uniquely determined by two state…
We study a financial model with a non-trivial price impact effect. In this model we consider the interaction of a large investor trading in an illiquid security, and a market maker who is quoting prices for this security. We assume that the…
We present a simple order book mechanism that regulates an artificial financial market with self-organized criticality dynamics and fat tails of returns distribution. The model shows the role played by individual imitation in determining…
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs,…
We propose a simple statistical-physics-inspired model for the effect of intrinsic fluctuations on supply and demand in markets. The model consists of agents that trade in two types of goods of which the total number is separately…
In this article we model chaotic dynamics in financial markets by treating the market price, and market makers' inventory, as anharmonic oscillators with a nonlinear coupling. The market makers' risk appetite being the key parameter that…
Hanson's market scoring rules allow us to design a prediction market that still gives useful information even if we have an illiquid market with a limited number of budget-constrained agents. Each agent can "move" the current price of a…
In this work, we investigate the market-making problem on a trading session in which a continuous phase on a limit order book is followed by a closing auction. Whereas standard optimal market-making models typically rely on terminal…
We consider a one-period Kyle (1985) framework where the insider can be subject to a penalty if she trades. We establish existence and uniqueness of equilibrium for virtually any penalty function when noise is uniform. In equilibrium, the…
In this paper, we develop a Markovian model that deals with the volume offered at the best quote of an electronic order book. The volume of the first limit is a stochastic process whose paths are periodically interrupted and reset to a new…
Despite the fact that an intraday market price distribution is not normal, the random walk model of price behaviour is as important for the understanding of basic principles of the market as the pendulum model is a starting point of many…
Managing the prediction of metrics in high-frequency financial markets is a challenging task. An efficient way is by monitoring the dynamics of a limit order book to identify the information edge. This paper describes the first publicly…
In this paper we explore optimal liquidation in a market populated by a number of heterogeneous market makers that have limited inventory-carrying and risk-bearing capacity. We derive a reduced form model for the dynamic of their aggregated…
Starting from the Avellaneda-Stoikov framework, we consider a market maker who wants to optimally set bid/ask quotes over a finite time horizon, to maximize her expected utility. The intensities of the orders she receives depend not only on…
Market equilibria of matching markets offer an intuitive and fair solution for matching problems without money with agents who have preferences over the items. Such a matching market can be viewed as a variation of Fisher market, albeit…
The common wisdom argues that, in general, large trades cause large price changes, while small trades cause small price changes. However, for extremely large price changes, the trade size and news play a minor role, while the liquidity…
The over-the-counter (OTC) market is characterized by a unique feature that allows market makers to adjust bid-ask spreads based on order size. However, this flexibility introduces complexity, transforming the market-making problem into a…