Searcharxiv⌕ Search

arXiv · 2610.31903

Optimal Size in Market Making under State-Dependent Hawkes Process

Abstract

We study market making with a parametric model of executed volume that accounts for quote placement and state-dependent order flow. Executed volume is expressed as the product of an average order size, an exponential demand function, and a Prony-series multiplier depending on quote depth, market-order count constructed from a state-dependent Hawkes model. An approximation result for finite Prony sums on a compact state domain provides a mathematical basis for the representation. An empirical study of limit-order-book data examines the calibrated demand and intensity models, sensitivity to inventory restrictions, and the resulting placement policies. In retrospective evaluations conditional on realised order-flow paths, the selected calibration achieves higher terminal utility than a baseline while respecting the prescribed inventory bound. The comparisons also distinguish the contribution of trading revenues from that of inventory control. The resulting closed-form volume specification takes placement levels as inputs and can therefore be used with alternative quoting rules.

Explore related subjects

Keep this discovery

Explore connections, maps & timelines

BibTeXRIS

Jonathan Chávez Casillas, Li Gan. 2026-10-22. Optimal Size in Market Making under State-Dependent Hawkes Process. https://arxiv.org/abs/2610.31903

Cite the original work for its findings. Save a collection to share your selection of sources.

KEEP EXPLORING

Related papers

Depositing More Should Not Earn Less: Supplier Income Monotonicity and Rate Curve Design in Pooled Lending Markets

In utilization dependent interest rate models, adding liquidity can reduce a supplier's total interest income even as the supplier's balance increases. A supplier holding a fraction $α$ of final pool supply keeps income nondecreasing with a marginal deposit exactly when $α(1+η)\leq1$, where $η$ is the elasticity of the borrow rate with respect to utilization. When the condition fails, the supplier can instead raise its income by withdrawing, which pushes utilization further up. On two public Drift markets, a lender held more of the pool than the curve protected in at least one hour in nine on SOL and one in thirteen on USDC. A protocol turns this into a design constraint by choosing, at each utilization, the largest supplier share it intends to protect. That choice caps the elasticity, and integrating the cap describes every admissible curve. Protecting the same share at every utilization gives a power law boundary, and protecting every fresh depositor gives a hyperbolic one. On a multiple kink USDT market, compliant repairs can lower or raise supplier income, because the constraint governs how income responds to a deposit and not the price level.

q-fin.TR↗

Optimal Order Placement under a State-Dependent Hawkes Process Limit Order Book model

We study optimal quote placement for a market maker facing order flow modeled by a state-dependent Hawkes process. A block-based linear demand specification links market-order counts to execution volumes, providing the demand moments required by a continuous time discrete state dynamic programming formulation. Under a quadratic terminal inventory penalty, we characterize inventory-dependent quotes and derive backward recursions for the coefficients of a quadratic value function. Numerical experiments using LOBSTER data examine quote distributions, inventory exposure, and terminal wealth. The implemented strategy yields higher aggregate terminal wealth than fixed-spread benchmarks at one and three ticks, but lower wealth than the two-tick benchmark. These results illustrate the framework's numerical implementation and distinguish terminal-wealth comparisons from evaluation under the inventory-penalized objective.

q-fin.TR↗

Do Round Numbers Hold Prices? Occupation Densities and Depth-Conditioned Hazards in the Limit Order Book

Prices cluster at round numbers, a pattern often interpreted as evidence that these levels act as price barriers. This pattern also admits a mechanical explanation: more liquidity rests there, and prices take longer to leave deeper queues. Limit order book data allow us to distinguish these mechanisms through a tick-grid framework in which local time counts departures and level-wise volatility reflects the departure hazard. Using data for five Nasdaq stocks throughout 2025, we find that round levels attract more liquidity but do not exhibit longer depth-adjusted durations. Intel and SoFi show directional effects, with departures biased away from round levels.

q-fin.TR↗