MARKET MAKING KEVIN CHEN, KAPIL KANAGAL, YU WU

MARKET MAKING EXPLAINED

•  MARKET MAKERS PROVIDE LIQUIDITY IN AN EXCHANGE BY QUOTING BOTH A BID AND ASK PRICE IN A FINANCIAL INSTRUMENT

•  MAKE PROFIT BY TAKING ADVANTAGE OF THE BID-ASK SPREAD

MARKET MAKING EXAMPLE

Market Maker

Person 1 (Seller)

$199 1 iPod

Person 2 (Buyer)

$201 1 iPod

+$2.00

$201

$199

Bid

Ask

Pric

e

STRATEGY OUTLINE

•  LOOK AT MARKET BOOK DATA AND PERIODICALLY GENERATE SIGNAL INDICATING EVOLUTION OF STOCK PRICE

•  POST BID AND ASK ORDERS ADJUSTED FOR THIS EVOLUTION

•  IF ONLY ONE SIDE ONLY IS HIT AFTER A WAITING PERIOD, CANCEL ORDER AND POST NEW ADJUSTED QUOTES

Li, Deng, Zhu, Wang, Xie; An intelligent market making strategy in algorithmic trading

PREAMBLE STRATEGY TRAINING

•  SVM FROM HISTORICAL DATA

•  SAMPLING OF MARKET BOOK DATA

•  STOP LOSS FUNCTION

Li, Deng, Zhu, Wang, Xie; An intelligent market making strategy in algorithmic trading

START END

Market Close?

Unwind positions

MAIN PROGRAM FLOW

Signal Training

Order Signal

Processing

Order Management

Current Orderbook

Data

Historical Orderbook

Data

Y

N

Order Updates

ORDER SIGNAL PROCESSING

Current Orderbook

Data

Compute Signal Signal

change?

Cancel Orders

Check Stop Loss

Put New Orders

Stop loss needed?

Unwind position

N

Y

Y

N

ORDER MANAGEMENT

Posted Orders

Expired?

Outstanding Orders?

New Execution?

Extend Timer for outstanding

orders

Cancel Outstanding

Orders

N

Y

Y

N

Y

N