Non-Convex Market Makers: Coherence without Convexity, Friction, and Parallel Composition

Peter Cotton

Papers from arXiv.org

Abstract: Cost-function market makers are always assumed convex, and convexity is not what makes them coherent. For a path-independent maker the exact no-arbitrage condition is a chord condition, that every chord slope of the cost lie in the convex hull of payoffs; convexity enters the standard axiomatics through a separate requirement, monotone information incorporation, and dropping it leaves coherent non-convex makers. Rational flow against such a maker trades the convex envelope, so non-convexity costs expressiveness rather than soundness, and a proportional fee of at least the arbitrage depth restores no-arbitrage, which by conjugation is a bid-ask spread with an exact no-trade interval for any cost whatever. Combining fee-bearing makers is an infimal convolution solved by one monotone clearing-price root-find, with sparse participation and a consolidated limit order book as the aggregate, and a deep quadratic co-quoter is Moreau smoothing, which preserves coherence at every depth. Any quoted configuration outside the coherent hull admits a portfolio priced below its worst payoff, so arbitrageurs act as decentralized separation oracles, and coherence is relative to friction and to the cost of finding certificates.

Date: 2026-10
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