Mathematical Finance & Financial Data Science Seminar

AI driven liquidity provision in OTC financial markets

Speaker: Roel Oomen, Deutsche Bank & London School of Economics

Location: Online Zoom access provided to registrants

Date: Tuesday, November 15, 2022, 5:30 p.m.

Synopsis:

Providing liquidity in over-the-counter markets is a challenging under-taking, in large part because a market maker does not observe where their competitors quote, nor do they typically know how many rivals they compete with or what the trader’s overall liquidity demand is. Optimal pricing strategies can be derived in theory assuming full knowledge of the competitive environment, but these results do not translate into practice where information is incomplete and asymmetric. This paper studies whether artificial intelligence, in the formof multi-armed bandit reinforcement learning algorithms, can be used by liquidity providers to dynamically set spreads using only information that is commonly available to them. We also investigate whether collusive effects can arise when competing liquidity providers all employ such algorithms. Our findings are as follows. In a single-agent setup where only one liquidity provider is optimising pricing in an otherwise static environment, all the algorithms considered are able to locate the theoretically optimal pricing policy, albeit they do so quite inefficiently when compared to a model-based approach. In a multi-agent setting where competing liquidity providers simultaneously and independently use algorithms to optimise pricing, we demonstrate that for one class of algorithms (pseudo) collusion can not arise, while for another it can arise in certain circumstances and we provide examples where it does. The scenarios where collusive effects appear, however, are fragile, sensitive to the specific configuration and exceedingly unlikely to occur in practice. Moreover, with a modest number of competitors, collusive effects that might otherwise arise in some of the most contrived scenarios are largely or entirely eliminated.

Speaker Bio:

Roel is the global head of FIC quantitative trading at Deutsche Bank. He started his industry career as a quant in electronic cash equity trading in 2006, and subsequently held various roles in electronic FX spot trading, including co-head of the business. Roel holds a PhD in econometrics, is a senior research fellow at the London School of Economics, and has published widely on the econometric analysis of high frequency data and FX trading.

 

Notes:

This event is free, but requires registration.  Please click here to register.  You will then receive the Zoom link by email about a day or so before the event.