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Optimal Market Making in the Foreign Exchange Market


  • Luitgard Veraart


This paper is concerned with optimal market making in the foreign exchange market. The market maker's holdings in the different currencies are modelled as stochastic processes that are influenced by both the stochastic exchange rates and the stochastic customer buy and sell orders. The market maker can control their own bid and ask price quotes and, additionally, can buy and sell at other market participants' quotes. The resulting stochastic control problem consists of a controlled diffusion problem for the optimal quotes and a singular control problem for optimal trades at other market participants' quotes. A Markov chain approximation is used to derive optimal strategies.

Suggested Citation

  • Luitgard Veraart, 2010. "Optimal Market Making in the Foreign Exchange Market," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(4), pages 359-372.
  • Handle: RePEc:taf:apmtfi:v:17:y:2010:i:4:p:359-372 DOI: 10.1080/13504860903387588

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    References listed on IDEAS

    1. Shane Miller & Eckhard Platen, 2004. "A Two-Factor Model for Low Interest Rate Regimes," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 107-133, March.
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    11. MacBeth, James D & Merville, Larry J, 1980. " Tests of the Black-Scholes and Cox Call Option Valuation Models," Journal of Finance, American Finance Association, vol. 35(2), pages 285-301, May.
    12. Schroder, Mark Douglas, 1989. " Computing the Constant Elasticity of Variance Option Pricing Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 211-219, March.
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    Cited by:

    1. Xin Guo & Zhao Ruan & Lingjiong Zhu, 2015. "Dynamics of Order Positions and Related Queues in a Limit Order Book," Papers 1505.04810,, revised Oct 2015.
    2. Christoph Kuhn & Matthias Riedel, 2012. "Price-Setting of Market Makers: A Filtering Problem with an Endogenous Filtration," Papers 1210.4000,


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