What question did this study set out to answer?

To determine an optimal high-frequency trading strategy for setting bid and ask quotes while managing inventory and transaction risks.

March 29, 2008Quantitative Finance

High-frequency trading in a limit order book

View Full Paper

Ask AI

Bookmark

To determine an optimal high-frequency trading strategy for setting bid and ask quotes while managing inventory and transaction risks.
Formulated a stock dealer's optimization problem within a maximal expected utility framework, modeling mid-price fluctuations via diffusion and order arrivals via a Poisson process.
Solved the model using a two-step approach: calculating an inventory-dependent indifference valuation and calibrating quotes to the limit order book.
Simulated stock price paths to compare the proposed inventory-based model against a naive best bid/best ask benchmark.
The inventory-based quoting strategy achieved a higher overall return relative to the naive benchmark.
The strategy produced a lower profit-and-loss variance compared to standard best bid/best ask quoting.

Discussion

No takes yet. Share an insight, caveat, or question.

Implication

Computational simulation demonstrates superior profit and reduced variance for inventory-based quoting in limit order books, suggesting improved market-making efficiency.

Cite This Study

Avellaneda et al. (2008) studied this question.

synapsesocial.com/papers/69d90acccc20f7a91c3afe19 https://doi.org/10.1080/14697680701381228

View Full Paper

Ask AI

Bookmark

Implication

Computational simulation demonstrates superior profit and reduced variance for inventory-based quoting in limit order books, suggesting improved market-making efficiency.

High-frequency trading in a limit order book

Key Points

Discussion

Implication

Cite This Study

High-frequency trading in a limit order book

Key Points

Discussion

Implication

Cite This Study

Also Consider

Also Consider