This paper studies optimal market making for large--tick assets in the presence of latency. We formulate the problem using Markov Decision Processes . We provide explicit characterizations of the order value and the structure of the value functions. We use such characterizations to study when a market maker can earn a positive net profit and investigate the effect of latency. Numerical experiments are conducted to illustrate our results .
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 .
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consider a random walk model for the asset price, and formulate the market maker's optimization
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. We provide explicit characterizations of the order value and the structure of the value functions. We use such characterizations to study when
(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
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net profit and investigate the effect of latency. Numerical experiments are conducted to illustrate our results
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