Optimal make–take fees for market making regulation

DOI10.1111/MAFI.12295MaRDI QIDQ6078433zbMATH OpenFDO

Authors Omar El Euch, Thibaut Mastrolia, Mathieu Rosenbaum, Nizar Touzi

Publication date 27 September 2023

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1805.02741

zbMATH Keywords

financial regulationhigh-frequency tradingmake-take feesmarket makingprincipal-agent problemstochastic control

Mathematics Subject Classification ID

Mechanism design theory (91B03) Principal-agent models (91B43) Financial markets (91G15)

Abstract: We consider an exchange who wishes to set suitable make-take fees to attract liquidity on its platform. Using a principal-agent approach, we are able to describe in quasi-explicit form the optimal contract to propose to a market maker. This contract depends essentially on the market maker inventory trajectory and on the volatility of the asset. We also provide the optimal quotes that should be displayed by the market maker. The simplicity of our formulas allows us to analyze in details the effects of optimal contracting with an exchange, compared to a situation without contract. We show in particular that it leads to higher quality liquidity and lower trading costs for investors.

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Cites work

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Cited in

(15)

• Modeling and computation of an integral operator Riccati equation for an infinite-dimensional stochastic differential equation governing streamflow discharge
• Incentives, lockdown, and testing: from Thucydides' analysis to the COVID-19 pandemic
• Optimal fees for geometric mean market makers
• A continuous-time model of self-protection
• Optimal make-take fees in a multi market-maker environment
• A Mean-Field Game of Market-Making against Strategic Traders
• On Bid and Ask Side-Specific Tick Sizes
• Principal-agent problem with multiple principals
• An exit contract optimization problem
• Market Making and Incentives Design in the Presence of a Dark Pool: A Stackelberg Actor–Critic Approach
• Principal-multiagents problem under equivalent changes of measure: general study and an existence result
• A principal-agent model for optimal incentives in renewable investments
• Agency problem and mean field system of agents with moral hazard, synergistic effects and accidents
• Golden parachutes under the threat of accidents
• Randomisation with moral hazard: a path to existence of optimal contracts

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