A pure-jump market-making model for high-frequency trading

Chi Wai Law, Purdue University

Abstract

We propose a new market-making model which incorporates a number of realistic features relevant for high-frequency trading. In particular, we model the dependency structure of prices and order arrivals with novel self- and cross-exciting point processes. Furthermore, instead of assuming the bid and ask prices can be adjusted continuously by the market maker, we formulate the market maker's decisions as an optimal switching problem. Moreover, the risk of overtrading has been taken into consideration by allowing each order to have different size, and the market maker can make use of market orders, which are treated as impulse control, to get rid of excessive inventory. Because of the stochastic intensities of the cross-exciting point processes, the optimality condition cannot be formulated using classical Hamilton-Jacobi-Bellman quasi-variational inequality (HJBQVI), so we extend the framework of constrained forward backward stochastic differential equation (CFBSDE) to solve our optimal control problem.

Degree

Ph.D.

Advisors

Viens, Purdue University.

Subject Area

Mathematics|Statistics|Finance

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