A Model of Market Making and Price Impact

Angad Singh

Papers from arXiv.org

Abstract: Traders constantly consider the price impact associated with changing their positions. This paper seeks to understand how price impact emerges from the quoting strategies of market makers. To this end, market making is modeled as a dynamic auction using the mathematical framework of Stochastic Differential Games. In Nash Equilibrium, the market makers' quoting strategies generate a price impact function that is of the same form as the celebrated Almgren-Chriss model. The key insight is that price impact is the mechanism through which market makers earn profits while matching their books. As such, price impact is an essential feature of markets where flow is intermediated by market makers.

Date: 2021-01
New Economics Papers: this item is included in nep-des, nep-gth and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2101.01388 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2101.01388

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().