Optimal Liquidity Provision

24 Pages Posted: 7 Feb 2014 Last revised: 1 Nov 2016

See all articles by Christoph Kühn

Christoph Kühn

Goethe University Frankfurt

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: February 26, 2015

Abstract

A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration.

Keywords: Limit order markets, optimal liquidity provision, asymptotics.

JEL Classification: G11.

Suggested Citation

Kühn, Christoph and Muhle-Karbe, Johannes, Optimal Liquidity Provision (February 26, 2015). Swiss Finance Institute Research Paper No. 13-71. Available at SSRN: https://ssrn.com/abstract=2380724 or http://dx.doi.org/10.2139/ssrn.2380724

Christoph Kühn

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Johannes Muhle-Karbe (Contact Author)

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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