scholarly journals Welfare Effects of Market Making in Continuous Double Auctions

2017 ◽  
Vol 59 ◽  
pp. 613-650 ◽  
Author(s):  
Elaine Wah ◽  
Mason Wright ◽  
Michael P. Wellman
Keyword(s):  
Allocative Efficiency ◽  
Market Model ◽  
Model Parameters ◽  
Market Maker ◽  
Market Making ◽  
Market Makers ◽  
Continuous Double Auctions ◽  
Thin Markets ◽  
Heuristic Strategies ◽  
Fundamental Value

We investigate the effects of market making on market performance, focusing on allocative efficiency as well as gains from trade accrued by background traders. We employ empirical simulation-based methods to evaluate heuristic strategies for market makers as well as background investors in a variety of complex trading environments. Our market model incorporates private and common valuation elements, with dynamic fundamental value and asymmetric information. In this context, we compare the surplus achieved by background traders in strategic equilibrium, with and without a market maker. Our findings indicate that the presence of the market maker strongly tends to increase total welfare across various environments. Market-maker profit may or may not exceed the welfare gain, thus the effect on background-investor surplus is ambiguous. We find that market making tends to benefit investors in relatively thin markets, and situations where background traders are impatient, due to limited trading opportunities. The presence of additional market makers increases these benefits, as competition drives the market makers to provide liquidity at lower price spreads. A thorough sensitivity analysis indicates that these results are robust to reasonable changes in model parameters.

scholarly journals MARKET MAKING WITH ALPHA SIGNALS

2020 ◽  
Vol 23 (03) ◽  
pp. 2050016
Author(s):  
ÁLVARO CARTEA ◽  
YIXUAN WANG
Keyword(s):  
High Frequency ◽  
High Frequency Data ◽  
Model Parameters ◽  
Market Maker ◽  
Electronic Market ◽  
Market Making ◽  
Liquidity Provision ◽  
Limit Orders ◽  
Adverse Selection Costs ◽  
Downward Pressure

We show how a market maker employs information about the momentum in the price of the asset (i.e. alpha signal) to make decisions in their liquidity provision strategy in an order-driven electronic market. The momentum in the midprice of the asset depends on the execution of liquidity taking orders and the arrival of news. Buy market orders (MOs) exert a short-lived upward pressure on the midprice, whereas sell MOs exert a short-lived downward pressure on the midprice. We employ Nasdaq high-frequency data to estimate model parameters and to illustrate the performance of the market making strategy. The market maker employs the alpha signal to minimise adverse selection costs, execute directional trades in anticipation of price changes, and to manage inventory risk. As the market maker increases their tolerance to inventory risk, the expected profits that stem from the alpha signal increase because the strategy employs more speculative MOs and performs more roundtrip trades with limit orders.

scholarly journals Os efeitos da introdução de agentes de liquidez no mercado acionário brasileiro

2013 ◽  
Vol 11 (2) ◽  
pp. 281
Author(s):  
Marcelo Perlin
Keyword(s):  
Event Study ◽  
High Frequency ◽  
Financial Institution ◽  
Stock Exchange ◽  
Market Maker ◽  
Average Increase ◽  
Market Making ◽  
Market Makers ◽  
Liquidity Provision ◽  
Before And After

The main objective of this study is to analyze the empirical effects of the introduction of market makers in the Brazilian stock exchange. By aggregating information regarding the dates of the market maker’s contract and the use of a privileged high frequency database, it was possible to execute an event study to check the effect of the introduction of liquidity agents. As expected, the period after the beginning of the market maker’s contract presented a significant increase in the liquidity of the stocks. The study reports an average increase of 31% in the number of trades in the period before and after the start of the contract. Another result is that the work of a liquidity agent can change significantly the autocorrelation of the trade signs in approximately 10%. Such a result is stronger for the stocks with lower liquidity. The investigation also shows heterogeneous results for the performance of the liquidity provision when the analysis based itself on the financial institution of the market maker. Such information is particularly important for companies that are seeking to contract market making services.

scholarly journals MARKET MAKING AND PORTFOLIO LIQUIDATION UNDER UNCERTAINTY

2014 ◽  
Vol 17 (05) ◽  
pp. 1450034 ◽  
Author(s):  
KAJ NYSTRÖM ◽  
SIDI MOHAMED OULD ALY ◽  
CHANGYONG ZHANG
Keyword(s):  
Reference Price ◽  
Probabilistic Models ◽  
Practical Importance ◽  
Model Parameters ◽  
Market Maker ◽  
Model Risk ◽  
Market Making ◽  
Optimal Liquidation ◽  
Limit Orders ◽  
Order Books

Market making and optimal portfolio liquidation in the context of electronic limit order books are of considerably practical importance for high frequency (HF) market makers as well as more traditional brokerage firms supplying optimal execution services for clients. In general, the two problems are based on probabilistic models defined on certain reference probability spaces. However, due to uncertainty in model parameters or in periods of extreme market turmoil, ambiguity concerning the correct underlying probability measure may appear and an assessment of model risk, as well as the uncertainty on the choice of the model itself, becomes important, as for a market maker or a trader attempting to liquidate large positions, the uncertainty may result in unexpected consequences due to severe mispricing. This paper focuses on the market making and the optimal liquidation problems using limit orders, accounting for model risk or uncertainty. Both are formulated as stochastic optimal control problems, with the controls being the spreads, relative to a reference price, at which orders are placed. The models consider uncertainty in both the drift and volatility of the underlying reference price, for the study of the effect of the uncertainty on the behavior of the market maker, accounting also for inventory restriction, as well as on the optimal liquidation using limit orders.

scholarly journals Simulation Research on Artificial Financial Market Based on Multiple Competitive Market-Makers

2012 ◽  
Vol 6-7 ◽  
pp. 722-729
Author(s):  
Xiao Feng Lin ◽  
Hong Tao Zhou ◽  
Wei Zeng ◽  
Hao Wang
Keyword(s):  
Financial Market ◽  
Simulation Experiment ◽  
Learning Rule ◽  
Competitive Market ◽  
Learning Ability ◽  
Market Maker ◽  
Simulation Research ◽  
Market Makers ◽  
The Past ◽  
Fundamental Value

Most of the past studies about dealership market involved only one monoplistic market-maker. The paper aims to build an artificial financial market based on multiple competitive market makers on ANYLOGIC platform, in which one market-maker adopts BAYES learning rule to estimate the fundamental value and the other employs a rough method. In order to validate the effectiveness of dealers’ quotes, we carried out two group simulation experiment. The results show that the quote of each dealer can converge to the fundamental value with certain deviation. What’s more, the deviation of the market-maker with learning ability is smaller while the converging speed slower.

scholarly journals Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

Mathematics ◽  
2021 ◽  
Vol 9 (14) ◽  
pp. 1610
Author(s):  
Katia Colaneri ◽  
Alessandra Cretarola ◽  
Benedetta Salterini
Keyword(s):  
Stock Prices ◽  
Regime Switching ◽  
Common Factor ◽  
Optimal Investment ◽  
Investment Strategy ◽  
Market Model ◽  
Sensitivity Analyses ◽  
Model Parameters ◽  
Insurance Company ◽  
Optimal Investment Strategy

In this paper, we study the optimal investment and reinsurance problem of an insurance company whose investment preferences are described via a forward dynamic exponential utility in a regime-switching market model. Financial and actuarial frameworks are dependent since stock prices and insurance claims vary according to a common factor given by a continuous time finite state Markov chain. We construct the value function and we prove that it is a forward dynamic utility. Then, we characterize the optimal investment strategy and the optimal proportional level of reinsurance. We also perform numerical experiments and provide sensitivity analyses with respect to some model parameters.

A Choice-Theoretical Labour-Market Model: Empirical Tests at the Mesolevel

1988 ◽  
Vol 20 (8) ◽  
pp. 1085-1102 ◽  
Author(s):  
J Baumann ◽  
M M Fischer ◽  
U Schubert
Keyword(s):  
Labour Market ◽  
Choice Theory ◽  
Labour Force ◽  
Labour Force Participation ◽  
Market Model ◽  
Reduced Form ◽  
Model Parameters ◽  
Regional Labour Markets ◽  
Empirical Tests ◽  
Supply Model

This paper contains an analysis of a multiregional labour-supply model for Austria. In the approach suggested here attempts are made to combine the advantages of random-utility-based discrete choice theory and partial reduced-form estimation. Two recursive submodels, the labour-force participation submodel, and the commuting and employment submodel, are developed. Three different types of model specifications at the mesolevel are used to analyse the consequences of choosing a spatial framework of overlapping regional labour markets upon the model parameters, to investigate the usefulness of the model approach in relation to different regionalisation variants, and to carry out a sensitivity analysis with respect to the effects of the model parameters used to delineate the labour-market regions.

Uncertainty, Profit, and the Limits of Markets

2021 ◽  
pp. 106591292110358
Author(s):  
Roni Hirsch
Keyword(s):  
Allocative Efficiency ◽  
Market Model ◽  
Perfect Competition ◽  
Political Debate ◽  
Trade Off ◽  
Starting Point ◽  
Knowledge Uncertainty ◽  
Market Benefits ◽  
Capitalist Democracies ◽  
The Ideal

The neoclassical market model is the overwhelming basis for contemporary views of markets as fair, efficient, or both. But is it an appropriate starting point? The article draws on Frank Knight’s 1920s work on the economics of uncertainty to show that the ideal of perfect competition conceals a tacit trade-off between equality and certainty. Largely undetected, this trade-off continues to govern financialized capitalist democracies, evading normative and political debate. By explaining how markets and firms resolve the problem of uncertainty, Knight shows that all supposed market benefits, even allocative efficiency, are not costless to society. More specifically, Knight argued that modern markets are premised on a tacit agreement between a handful of “daring” entrepreneurs and the “risk-averse” public: the former agree to carry the uncertainties of business-life in return for a substantially larger share of its power and rewards. Despite the highly static assumptions of neoclassicism, therefore, and its linked assumption of perfect knowledge, uncertainty is far from absent in modern economics. It is built into firms and markets and manifests itself as a steep social and material hierarchy.

scholarly journals Valuation of Quanto Floating Range Notes under the Cross-Currency LIBOR Market Model

2015 ◽  
Vol 7 (12) ◽  
pp. 70 ◽  
Author(s):  
Chi-Hsun Chou ◽  
Tsung-Yu Hsieh ◽  
Son-Nan Chen
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Market Model ◽  
Model Parameters ◽  
Rate Process ◽  
Multifactor Model ◽  
Libor Market Model ◽  
Empirical Results ◽  
The Cross ◽  
The Exchange Rate

<p>In this paper, we propose analytical valuation formulae for three types of quanto floating range notes based on the cross-currency LIBOR market model. The dynamics of forward LIBOR rates is a multifactor model that incorporates both the domestic and foreign interest rate process and the exchange rate process in a cross-currency environment. The derived formulae are analytically tractable and easy to implement in practice. The model parameters can be extracted directly from market quantities. We show that the empirical results are more accurate and robust than the results ofMonte Carlosimulation.</p>

ON MARKET MAKER FUNCTIONS

2012 ◽  
Vol 3 (1) ◽  
pp. 61-63 ◽  
Author(s):  
Robin Hanson
Keyword(s):  
Scoring Rules ◽  
Double Auction ◽  
Market Maker ◽  
Main Function ◽  
Market Makers ◽  
Continuous Double Auction

Since market scoring rules have become popular as a form of market maker, it seems worth reviewing just what such mechanisms are intended to do.The main function performed by most market makers is to serve as an intermediary between people who prefer to trade at different times.  Traders who have the same favorite times to trade can show up together to an ordinary continuous double auction, and then make and accept offers to trade.  But when traders have different favorite times, a market maker can help them by first making offers that some of them will accept, and then later making opposite offers which others will accept.  By adjusting prices in his favor, a market maker can even profit from providing this service.

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