Fundamental Issues in Automated Market Making
Yuriy Nemyvaka (Carnegie Mellon University, USA), Katia Sycara (Carnegie Mellon University, USA) and Duane J. Seppi (Carnegie Mellon University, USA)
Copyright: © 2006
The goal of this chapter is to establish an analytical foundation for electronic market making. We use two classes of models to reason about this domain: structured and relaxed. In our structured model, we will formalize the decision process of a dealer and then use a simple class of trading strategies to highlight several fundamental issues in market making. In our relaxed model, we treat the dealer’s quotes and transaction prices as a simple time series. We apply statistical techniques to discern possible structure in the data and then make conclusions about the dealer’s optimal behavior. Our main interest is a normative automation of the securities dealer’s activities, as opposed to explanatory modeling of human traders, which is the primary concern of earlier studies in this area.