Short-Term Market Changes and Market Making with Inventory
12 Pages Posted: 25 Jul 2020
Date Written: July 1, 2020
We study optimal trading strategy of a market maker with stock inventory in the presence of short-term market changes, especially changes in trading intensity of market participants and stock volatility. We employ Poisson jump processes in modelling such market condition changes. We provide closed form optimal bidding and asking strategies of the market maker, and analyze the market maker’s inventory changes accordingly.
Keywords: Market Maker, Regime Switching, Inventory Management, Intraday Trade, Market Micro-Structure
JEL Classification: C61, D40, G11
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