Timezone: »
We study the profit-maximization problem of a monopolistic market-maker who sets two-sided prices in an asset market. The sequential decision problem is hard to solve because the state space is a function. We demonstrate that the belief state is well approximated by a Gaussian distribution. We prove a key monotonicity property of the Gaussian state update which makes the problem tractable, yielding the first optimal sequential market-making algorithm in an established model. The algorithm leads to a surprising insight: an optimal monopolist can provide more liquidity than perfectly competitive market-makers in periods of extreme uncertainty, because a monopolist is willing to absorb initial losses in order to learn a new valuation rapidly so she can extract higher profits later.
Author Information
Sanmay Das (Rensselaer Polytechnic Institute)
Malik Magdon-Ismail (RPI)
More from the Same Authors
-
2015 Poster: Column Selection via Adaptive Sampling »
Saurabh Paul · Malik Magdon-Ismail · Petros Drineas -
2015 Poster: Approximating Sparse PCA from Incomplete Data »
ABHISEK KUNDU · Petros Drineas · Malik Magdon-Ismail -
2013 Workshop: Large Scale Matrix Analysis and Inference »
Reza Zadeh · Gunnar Carlsson · Michael Mahoney · Manfred K. Warmuth · Wouter M Koolen · Nati Srebro · Satyen Kale · Malik Magdon-Ismail · Ashish Goel · Matei A Zaharia · David Woodruff · Ioannis Koutis · Benjamin Recht -
2011 Poster: Sparse Features for PCA-Like Linear Regression »
Christos Boutsidis · Petros Drineas · Malik Magdon-Ismail -
2010 Poster: Permutation Complexity Bound on Out-Sample Error »
Malik Magdon-Ismail