High-frequency trading in a limit order book

@inproceedings{Avellaneda2008HighfrequencyTI,
  title={High-frequency trading in a limit order book},
  author={Marco Avellaneda and Sasha Stoikov},
  year={2008}
}
We study a stock dealer’s strategy for submitting bid and ask quotes in a limit order book. The agent faces an inventory risk due to the diffusive nature of the stock’s mid-price and a transactions risk due to a Poisson arrival of market buy and sell orders. After setting up the agent’s problem in a maximal expected utility framework, we derive the solution in a two step procedure. First, the dealer computes a personal indifference valuation for the stock, given his current inventory. Second… CONTINUE READING

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