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Algorithmic and High-Frequency Trading Problems for Semi-Markov and Hawkes Jump-Diffusion Models

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  • Luca Lalor
  • Anatoliy Swishchuk

Abstract

Algorithmic and High-Frequency trading (HFT) has become one of the main ways to complete transactions in many of today's major financial markets, with these transactions taking place inside what is called the limit order book (LOB). Developing sophisticated trading algorithms that accurately mimic LOB data is therefore a major topic in this area. In recent times, it has been proven that LOB data often follows non-Markovian dynamics, thus, we believe these models more accurately describe how the LOB would evolve. In this paper, we consider acquisition and liquidation problems for semi-Markov and Hawkes jump-diffusion models. We begin by developing jump-diffusion models to capture these dynamics and then proceed to use diffusion approximations for the jump parts. The optimal solutions to these trading problems are formulated under the stochastic optimal control framework and via numerical methods. Strategy simulations for the acquisition and liquidation problems are considered as well, where we show sample price paths for our price processes, average traded prices, inventory and trading speed paths. This analysis gives a general picture of how one could analyse how these strategies could perform under our more general price processes.

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  • Luca Lalor & Anatoliy Swishchuk, 2024. "Algorithmic and High-Frequency Trading Problems for Semi-Markov and Hawkes Jump-Diffusion Models," Papers 2409.12776, arXiv.org.
    • Handle: RePEc:arx:papers:2409.12776
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    References listed on IDEAS

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    1. Anatoliy Swishchuk & Aiden Huffman, 2020. "General Compound Hawkes Processes in Limit Order Books," Risks, MDPI, vol. 8(1), pages 1-25, March.
    2. Ana Roldan Contreras & Anatoliy Swishchuk, 2022. "Optimal Liquidation, Acquisition and Market Making Problems in HFT under Hawkes Models for LOB," Risks, MDPI, vol. 10(8), pages 1-32, August.
    3. Álvaro Cartea & Ryan Donnelly & Sebastian Jaimungal, 2018. "Enhancing trading strategies with order book signals," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(1), pages 1-35, January.
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    8. Qiyue He & Anatoliy Swishchuk, 2019. "Quantitative and Comparative Analyses of Limit Order Books with General Compound Hawkes Processes," Risks, MDPI, vol. 7(4), pages 1-21, November.
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