Optimal Liquidity Provision
24 Pages Posted: 7 Feb 2014 Last revised: 1 Nov 2016
Date Written: February 26, 2015
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: Suggested Citation