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Order-book modelling and market making strategies

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  • Xiaofei Lu
  • Fr'ed'eric Abergel

Abstract

Market making is one of the most important aspects of algorithmic trading, and it has been studied quite extensively from a theoretical point of view. The practical implementation of so-called "optimal strategies" however suffers from the failure of most order book models to faithfully reproduce the behaviour of real market participants. This paper is twofold. First, some important statistical properties of order driven markets are identified, advocating against the use of purely Markovian order book models. Then, market making strategies are designed and their performances are compared, based on simulation as well as backtesting. We find that incorporating some simple non-Markovian features in the limit order book greatly improves the performances of market making strategies in a realistic context.

Suggested Citation

  • Xiaofei Lu & Fr'ed'eric Abergel, 2018. "Order-book modelling and market making strategies," Papers 1806.05101, arXiv.org.
    • Handle: RePEc:arx:papers:1806.05101
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    References listed on IDEAS

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    Cited by:

    1. Peng Wu & Marcello Rambaldi & Jean-François Muzy & Emmanuel Bacry, 2023. "A single queue-reactive Hawkes model for the order flow," Post-Print hal-02409073, HAL.
    2. Peng Wu & Marcello Rambaldi & Jean-François Muzy & Emmanuel Bacry, 2021. "Queue-reactive Hawkes models for the order flow," Working Papers hal-02409073, HAL.
    3. Peng Wu & Marcello Rambaldi & Jean-Franc{c}ois Muzy & Emmanuel Bacry, 2019. "Queue-reactive Hawkes models for the order flow," Papers 1901.08938, arXiv.org.

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