Mathematical Finance Seminar
Trading Illiquid Goods: Market Making as a Sequence of Sealed-Bid Auctions, with Analytic Results
Speaker: Peter Cotton, Data Science Division of J.P. Morgan
Location: Warren Weaver Hall 1302
Date: Tuesday, February 6, 2018, 5:30 p.m.
We provide analytic results for the optimal control problem faced by a market maker who can only obtain and dispose of inventory via a sequence of sealed-bid auctions. Under the assumption that the best competing response is exponentially distributed around a commonly discerned fair market price we examine properties of the market maker's optimal behavior. We show that simple adjustments to skew and width accommodate customer arrival imbalance. We derive a straightforward relationship between the market marker's fill probability and direct holding costs. A simple formula for optimal bidding in terms of (non-myopic) inventory cost is presented. We present the results as a perturbation of an improvement to a "linear skew, constant width" (CWLS) market making heuristic.
Peter Cotton works in the Data Science division of J.P. Morgan. He is the creator of Roar Data, a platform brokering real-time data sources and prediction algorithms. Previously he lead research into automated market making for corporate bonds, and prior to joining J.P. Morgan he founded Benchmark Solutions, creating the industry's first real-time pricing service for bonds and credit default swaps --- technology now incorporated into Bloomberg.
5:10pm - Registration
5:30pm - Presentation
6:30pm - Networking
7:00pm - The END