Cooperation between independent market makers

DOI10.1080/14697688.2022.2097943MaRDI QIDQ5051973zbMATH OpenOpenAlexFDO

Authors Bingyan Han

Publication date 18 November 2022

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2206.05410

zbMATH Keywords

financial regulationgeneral-sum gameindependent reinforcement learningmarket making

Mathematics Subject Classification ID

Artificial neural networks and deep learning (68T07) Applications of game theory (91A80) Financial markets (91G15)

Abstract: With the digitalization of the financial market, dealers are increasingly handling market-making activities by algorithms. Recent antitrust literature raises concerns on collusion caused by artificial intelligence. This paper studies the possibility of cooperation between market makers via independent Q-learning. Market making with inventory risk is formulated as a repeated general-sum game. Under a stag-hunt type payoff, we find that market makers can learn cooperative strategies without communication. In general, high spreads can have the largest probability even when the lowest spread is the unique Nash equilibrium. Moreover, introducing more agents into the game does not necessarily eliminate the presence of supra-competitive spreads.

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Cites work

• \({\mathcal Q}\)-learning
• A Simple Adaptive Procedure Leading to Correlated Equilibrium
• Generalized learning automata for multi-agent reinforcement learning
• High-frequency trading in a limit order book
• Negative Moments of Positive Random Variables
• On the Convergence of Stochastic Iterative Dynamic Programming Algorithms
• Optimal make-take fees in a multi market-maker environment
• Q-learning agents in a Cournot oligopoly model

Cited in

(3)

• AI-driven liquidity provision in OTC financial markets
• Towards multi‐agent reinforcement learning‐driven over‐the‐counter market simulations
• Dynamics of market making algorithms in dealer markets: Learning and tacit collusion

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