adaptive market making via online learning - papers.nips.cc.pdfVIP

Adaptive Market Making via Online Learning Jacob Abernethy⇤ Satyen Kale Computer Science and Engineering IBM T. J. Watson Research Center University of Michigan sckale@ jabernet@ Abstract We consider the design of strategies for market making in an exchange. A market maker generally seeks to profit from the difference between the buy and sell price of an asset, yet the market maker also takes exposure risk in the event of large price movements. Profit guarantees for market making strategies have typically required certain stochastic assumptions on the price fluctuations of the asset in question; for example, assuming a model in which the price process is mean reverting. We propose a class of “spread-based” market making strategies whose performance can be controlled even under worst-case (adversarial) settings. We prove structural properties of these strategies which allows us to design a master algorithm which obtains low regret relative to the best such strategy in hindsight. We run a set of experiments showing favorable performance on recent real-world stock price data. 1 Introduction When a trader enters a market, say a stock or commodity market, with the desire to buy or sell a certain quantity of an asset, how is this trader guaranteed to find a counterparty to agree to transact at a reasonable price? This is not a problem in a liquid market, with a deep pool of traders ready to buy or sell at any time, but in a thin market the lack of counterparties can be troublesome. A rushed trader may even be willing to transact at a worse price in exchange for immediate execution. This is where a market maker (MM) can be quite useful. A MM is any agent