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Bandit Market Makers


  • Nicolas Della Penna
  • Mark D. Reid


We introduce a modular framework for market making. It combines cost-function based automated market makers with bandit algorithms. We obtain worst-case profits guarantee's relative to the best in hindsight within a class of natural "overround" cost functions . This combination allow us to have distribution-free guarantees on the regret of profits while preserving the bounded worst-case losses and computational tractability over combinatorial spaces of the cost function based approach. We present simulation results to better understand the practical behaviour of market makers from the framework.

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  • Nicolas Della Penna & Mark D. Reid, 2011. "Bandit Market Makers," Papers 1112.0076,, revised Aug 2013.
  • Handle: RePEc:arx:papers:1112.0076

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    References listed on IDEAS

    1. Robin Hanson, 2007. "Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 3-15, February.
    2. Sébastien Bubeck & Rémi Munos & Gilles Stoltz & Csaba Szepesvari, 2011. "X-Armed Bandits," Post-Print hal-00450235, HAL.
    3. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    4. Madureira, Leonardo & Underwood, Shane, 2008. "Information, sell-side research, and market making," Journal of Financial Economics, Elsevier, vol. 90(2), pages 105-126, November.
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