Reinforcement Learning Approaches to Optimal Market Making

Abstract

Market making is the process whereby a market participant, called a market maker, simultaneously and repeatedly posts limit orders on both sides of the limit order book of a security in order to both provide liquidity and generate profit. Optimal market making entails dynamic adjustment of bid and ask prices in response to the market maker’s current inventory level and market conditions with the goal of maximizing a risk-adjusted return measure. This problem is naturally framed as a Markov decision process, a discrete-time stochastic (inventory) control process. Reinforcement learning, a class of techniques based on learning from observations and used for solving Markov decision processes, lends itself particularly well to it. Recent years have seen a very strong uptick in the popularity of such techniques in the field, fueled in part by a series of successes of deep reinforcement learning in other domains. The primary goal of this paper is to provide a comprehensive and up-to-date overview of the current state-of-the-art applications of (deep) reinforcement learning focused on optimal market making. The analysis indicated that reinforcement learning techniques provide superior performance in terms of the risk-adjusted return over more standard market making strategies, typically derived from analytical models.

Keywords

• deep reinforcement learning
• reinforcement learning
• finance
• market making
• machine learning
• deep learning