Applied Math Seminar
Title: Trading illiquid goods
Speaker: Peter Cotton, JP Morgan
Date: December 13, 2017
Location: Math 384-H
We provide analytic results for the optimal control problem faced by a market maker who can only obtain > and dispose of inventory via a sequence of sealed-bid auctions. Under the assumption that the best competing > response is exponentially distributed around a commonly discerned fair market price we examine properties > of the market maker's optimal behavior. We show that simple adjustments to skew and width accommodate > customer arrival imbalance. We derive a straightforward relationship between the market marker's ll prob- > ability and direct holding costs. A simple formula for optimal bidding in terms of inventory > cost is presented. We present the results as a perturbation of an improvement to a "linear skew, constant > width" (CWLS) market making heuristic.