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Electronic Market Making and Latency

Xuefeng Gao and Yunhan Wang

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Abstract: This paper studies the profitability of market making strategies and the impact of latency on electronic market makers' profits for large-tick assets. By analyzing the optimal market making problem using Markov Decision Processes, we provide simple conditions to determine when a market maker earns zero or positive profits and discuss economic implications. We also prove that higher latency leads to reduced profits for market makers, and conduct numerical experiments to illustrate the effect of latency and relative latency on the market maker's expected profit. Finally, our work highlights the importance of value of orders in optimal market making.

New Economics Papers: this item is included in nep-mst
Date: 2018-06
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