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SIGECOM
2011
ACM

Market making and mean reversion

8 years 2 months ago
Market making and mean reversion
Market making refers broadly to trading strategies that seek to profit by providing liquidity to other traders, while avoiding accumulating a large net position in a stock. In this paper, we study the profitability of market making strategies in a variety of time series models for the evolution of a stock’s price. We first provide a precise theoretical characterization of the profitability of a simple and natural market making algorithm in the absence of any stochastic assumptions on price evolution. This characterization exhibits a trade-off between the positive effect of local price fluctuations and the negative effect of net price change. We then use this general characterization to prove that market making is generally profitable on mean reverting time series — time series with a tendency to revert to a long-term average. Mean reversion has been empirically observed in many markets, especially foreign exchange and commodities. We show that the slightest mean reversion...
Tanmoy Chakraborty, Michael Kearns
Added 17 Sep 2011
Updated 17 Sep 2011
Type Journal
Year 2011
Where SIGECOM
Authors Tanmoy Chakraborty, Michael Kearns
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