Optimal high frequency trading with limit and market orders

Дата: 
24/11/11
Аномалии: 
Авторы: 
Fabien GUILBAUD Huy^en PHAM
Аннотация: 
We propose a framework for studying optimal market making policies in a limit order book (LOB). The bid-ask spread of the LOB is modelled by a Markov chain with nite values, multiple of the tick size, and subordinated by the Poisson process of the tick-time clock. We consider a small agent who continuously submits limit buy/sell orders at best bid/ask quotes, and may also set limit orders at best bid (resp. ask) plus (resp. minus) a tick for getting the execution order priority, which is a crucial issue in high frequency trading. By trading with limit orders, the agent faces an execution risk since her orders are executed only when they meet counterpart market orders, which are modelled by Cox processes with intensities depending on the spread and on her limit prices. By holding non-zero positions on the risky asset, the agent is also subject to the inventory risk related to price volatility. Then the agent can also choose to trade with market orders, and therefore get immediate execution, but at a least favorable price because she has to cross the bid-ask spread. The objective of the market maker is to maximize her expected utility from revenue over a short term horizon by a tradeo between limit and market orders, while controlling her inventory position. This is formulated as a mixed regime switching regular/impulse control problem that we characterize in terms of quasi-variational system by dynamic programming methods. In the case of a mean-variance criterion with martingale reference price or when the asset price follows a Levy process and with exponential utility criterion, the dynamic programming system can be reduced to a system of simple equations involving only the inventory and spread variables. Calibration procedures are derived for estimating the transition matrix and intensity parameters for the spread and for Cox processes modelling the execution of limit orders. Several computational tests are performed both on simulated and real data, and illustrate the impact and pro t when considering execution priority in limit orders and market orders.
Описание: 

Очень подробная статья по эффективному маркет-мейкингу. Анализируется бид-аск спред, медиана и значения спреда моделируются как Марковские процессы. Оптимизируются параметры постановки или сдвига лимитный ордеров, риски маркет-мейкинга и т.п. Очень полезная статья для оптимизации исполнения ордеров или собственно мм.