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Robust Market Making via Adversarial Reinforcement Learning

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  • Thomas Spooner
  • Rahul Savani

Abstract

We show that adversarial reinforcement learning (ARL) can be used to produce market marking agents that are robust to adversarial and adaptively-chosen market conditions. To apply ARL, we turn the well-studied single-agent model of Avellaneda and Stoikov [2008] into a discrete-time zero-sum game between a market maker and adversary. The adversary acts as a proxy for other market participants that would like to profit at the market maker's expense. We empirically compare two conventional single-agent RL agents with ARL, and show that our ARL approach leads to: 1) the emergence of risk-averse behaviour without constraints or domain-specific penalties; 2) significant improvements in performance across a set of standard metrics, evaluated with or without an adversary in the test environment, and; 3) improved robustness to model uncertainty. We empirically demonstrate that our ARL method consistently converges, and we prove for several special cases that the profiles that we converge to correspond to Nash equilibria in a simplified single-stage game.

Suggested Citation

  • Thomas Spooner & Rahul Savani, 2020. "Robust Market Making via Adversarial Reinforcement Learning," Papers 2003.01820, arXiv.org, revised Jul 2020.
  • Handle: RePEc:arx:papers:2003.01820
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    References listed on IDEAS

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    1. Olivier Guéant & Iuliia Manziuk, 2019. "Deep Reinforcement Learning for Market Making in Corporate Bonds: Beating the Curse of Dimensionality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 26(5), pages 387-452, September.
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    14. Thomas Spooner & John Fearnley & Rahul Savani & Andreas Koukorinis, 2018. "Market Making via Reinforcement Learning," Papers 1804.04216, arXiv.org.
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    Citations

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    Cited by:

    1. Leo Ardon & Nelson Vadori & Thomas Spooner & Mengda Xu & Jared Vann & Sumitra Ganesh, 2021. "Towards a fully RL-based Market Simulator," Papers 2110.06829, arXiv.org, revised Nov 2021.
    2. Nelson Vadori & Leo Ardon & Sumitra Ganesh & Thomas Spooner & Selim Amrouni & Jared Vann & Mengda Xu & Zeyu Zheng & Tucker Balch & Manuela Veloso, 2022. "Towards Multi-Agent Reinforcement Learning driven Over-The-Counter Market Simulations," Papers 2210.07184, arXiv.org, revised Aug 2023.
    3. Thomas Spooner & Rahul Savani, 2020. "A Natural Actor-Critic Algorithm with Downside Risk Constraints," Papers 2007.04203, arXiv.org.
    4. Ben Hambly & Renyuan Xu & Huining Yang, 2021. "Recent Advances in Reinforcement Learning in Finance," Papers 2112.04553, arXiv.org, revised Feb 2023.
    5. Bruno Gašperov & Stjepan Begušić & Petra Posedel Šimović & Zvonko Kostanjčar, 2021. "Reinforcement Learning Approaches to Optimal Market Making," Mathematics, MDPI, vol. 9(21), pages 1-22, October.
    6. Ben Hambly & Renyuan Xu & Huining Yang, 2023. "Recent advances in reinforcement learning in finance," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 437-503, July.
    7. Tessa Bauman & Bruno Gav{s}perov & Stjepan Beguv{s}i'c & Zvonko Kostanjv{c}ar, 2023. "Deep Reinforcement Learning for Robust Goal-Based Wealth Management," Papers 2307.13501, arXiv.org.
    8. Zhou Fang & Haiqing Xu, 2023. "Market Making of Options via Reinforcement Learning," Papers 2307.01814, arXiv.org.
    9. Shuo Sun & Molei Qin & Xinrun Wang & Bo An, 2023. "PRUDEX-Compass: Towards Systematic Evaluation of Reinforcement Learning in Financial Markets," Papers 2302.00586, arXiv.org, revised Mar 2023.
    10. Joseph Jerome & Gregory Palmer & Rahul Savani, 2022. "Market Making with Scaled Beta Policies," Papers 2207.03352, arXiv.org, revised Sep 2022.
    11. Shuo Sun & Rundong Wang & Bo An, 2021. "Reinforcement Learning for Quantitative Trading," Papers 2109.13851, arXiv.org.
    12. Joseph Jerome & Leandro Sanchez-Betancourt & Rahul Savani & Martin Herdegen, 2022. "Model-based gym environments for limit order book trading," Papers 2209.07823, arXiv.org.

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