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    Anishish Sharan

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    Anishish Sharan
    This paper develops a stochastic model to characterize the optimal pricing policy of a monopolistic market maker in the equity market. The authors formulate an objective function for the market maker that maximizes expected profit based on inventory levels and transaction prices. Constraints are defined such that the bid price must be less than the current price and ask price must be greater. A genetic algorithm is used to optimize the objective function subject to the constraints. The algorithm iteratively generates populations of bid-ask price pairs, evaluates them using the objective function, and genetically breeds new populations until an optimal solution is found. Results show the objective function values and corresponding optimal bid-ask prices for different inventory levels. A sanity check using gradient descent on the univariate objective functions

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    Anishish Sharan

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    Anishish Sharan
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    This paper develops a stochastic model to characterize the optimal pricing policy of a monopolistic market maker in the equity market. The authors formulate an objective function for the market maker that maximizes expected profit based on inventory levels and transaction prices. Constraints are defined such that the bid price must be less than the current price and ask price must be greater. A genetic algorithm is used to optimize the objective function subject to the constraints. The algorithm iteratively generates populations of bid-ask price pairs, evaluates them using the objective function, and genetically breeds new populations until an optimal solution is found. Results show the objective function values and corresponding optimal bid-ask prices for different inventory levels. A sanity check using gradient descent on the univariate objective functions

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    190040017 Anishish Sharan

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    This paper develops a stochastic model to characterize the optimal pricing policy of a monopolistic market maker in the equity market. The authors formulate an objective function for the market maker that maximizes expected profit based on inventory levels and transaction prices. Constraints are defined such that the bid price must be less than the current price and ask price must be greater. A genetic algorithm is used to optimize the objective function subject to the constraints. The algorithm iteratively generates populations of bid-ask price pairs, evaluates them using the objective function, and genetically breeds new populations until an optimal solution is found. Results show the objective function values and corresponding optimal bid-ask prices for different inventory levels. A sanity check using gradient descent on the univariate objective functions

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    29 views15 pages

    Anishish Sharan

    Uploaded by

    Anishish Sharan
    This paper develops a stochastic model to characterize the optimal pricing policy of a monopolistic market maker in the equity market. The authors formulate an objective function for the market maker that maximizes expected profit based on inventory levels and transaction prices. Constraints are defined such that the bid price must be less than the current price and ask price must be greater. A genetic algorithm is used to optimize the objective function subject to the constraints. The algorithm iteratively generates populations of bid-ask price pairs, evaluates them using the objective function, and genetically breeds new populations until an optimal solution is found. Results show the objective function values and corresponding optimal bid-ask prices for different inventory levels. A sanity check using gradient descent on the univariate objective functions

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    CE 771: Course

    Project

    Topic – Optimal Pricing Policy of a Monopolistic


    Market Maker in the Equity Market
    Authors - Eckart Mildenstein & Harold Schleef
    - Anishish Sharan (190040017)
    Brief Description

    Objective Function and


    Contents Constraints

    Optimization
    • Genetic Algorithm
    Brief Description:

    Until now the dynamics of the market maker's This paper starts in this direction by considering A stochastic model is developed for this. The
    pricing decision has either been ignored, treated optimal pricing for a single market maker in the authors have used methods of dynamic
    in an intuitive manner, or addressed without market. programming to characterize optimal pricing
    taking the relevant internal and external factors of policies.
    the market maker into account.
    Objective
    Function
    •

    • (x) = price*x

    • Bid price is less than the current


    price and ask price is greater than
    the current price
    Optimization Method – Genetic Algorithm

    • Genetic Algorithm is a method for


    solving both constrained and
    unconstrained optimization
    problems that is based on natural
    selection, the process that drives
    biological evolution. The genetic
    algorithm repeatedly modifies a
    population of individual solutions.
    Steps:
    1. Initial Generation(genes) comprises of multiple gene of the form – [bid_price,
    ask_price]
    2. Removal of genes that are not obeying the constraints
    3. Giving a fitness score, i.e the value of objective function, to all the genes present
    in the population, and arranging the gene present in the population in
    descending order of fitness score as we are maximizing
    4. Selecting the top genes out of the population which moves to the next iteration
    5. Now the top genes are mutated and cross over and to this some rouge genes are
    added to form the new population
    6. The new population goes to step 2, until the loop is finished
    7. We choose the gene, i.e bid and ask price, with highest fitness value from
    Code Snippets – Production of Population
    Code Snippet - Constraints
    Code Snippets - Selection
    Code Snippets – New Population
    Code Snippet – Overall Loop
    Results:
    Inventory Stocks 600 400 300 500
    Prices Obj func value Bid Price Ask Price Obj func value Bid Price Ask Price Obj func value Bid Price Ask Price Obj func value Bid Price Ask Price

    43 25795.35 41.35 43.78 17199.48 41.37 43.75 12901.50 41.33 43.82 21497.41 41.30 43.72
    44 26399.91 41.82 44.51 17604.09 41.89 44.53 13206.21 41.86 44.51 22002.03 41.88 44.51
    45 27006.61 42.43 45.50 18010.94 42.34 45.50 13513.04 42.36 45.51 22508.76 42.34 45.51

    46 27615.09 42.90 46.51 18419.56 42.87 46.50 13821.64 42.89 46.51 23017.24 42.87 46.51
    47 28225.32 43.33 47.52 18829.90 43.25 47.51 14132.21 43.39 47.50 23527.50 43.48 47.52
    48 28837.23 44.19 48.50 19242.22 43.83 48.50 14444.44 43.89 48.51 24039.85 43.86 48.51
    49 29451.71 44.31 49.50 19656.05 44.15 49.51 14758.35 44.37 49.52 24554.06 44.34 49.50

    50 30067.35 44.71 50.51 20071.73 44.60 50.52 15074.07 45.00 50.52 25069.90 44.79 50.50
    51 30684.97 45.45 51.51 20489.85 45.34 51.51 15392.43 45.48 51.50 25587.11 45.16 51.52
    52 31304.39 45.55 52.50 20909.42 45.78 52.51 15711.22 45.94 52.53 26107.31 45.79 52.50
    53 31925.83 46.06 53.50 21330.63 46.26 53.52 16033.68 46.40 53.50 26628.61 46.28 53.50

    54 32548.25 46.92 54.53 21753.83 47.05 54.51 16356.59 46.98 54.51 27151.76 46.90 54.51

    55 33174.23 47.49 55.50 22179.43 47.42 55.51 16681.49 47.18 55.52 27676.92 47.25 55.50
    56 33800.88 47.93 56.51 22606.13 48.07 56.51 17007.95 47.71 56.53 28203.77 47.95 56.50
    57 34429.73 48.27 57.51 23035.40 48.37 57.50 17337.64 48.33 57.51 28732.53 48.36 57.50
    58 35059.77 48.95 58.51 23465.44 48.88 58.51 17668.74 48.89 58.50 29262.82 48.97 58.51

    59 35692.56 49.40 59.51 23898.00 49.59 59.51 18000.92 49.48 59.51 29795.48 49.34 59.50
    Sanity Check of the algorithm
    • Upon comparing it with fixed step gradient descent of step size 0.3,
    we can see that the values that we get are still very close for price =
    55
    • Note 1: Fixed step gradient descent was implemented on univariate
    parts of the objective function, as the objective function can be
    separated into two univariate objective function, this is done by the
    authors during classical optimization
    • Note 2: The number of stocks in the inventory doesn’t change the bid
    and ask price for the market maker in this case
    Fixed step size – Optimization method
    Thank You

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