A Simple Strategy to Deal with Toxic Flow
Fuente:
arXiv
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| Autores principales: | , |
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| Formato: | Preprint |
| Publicado: |
2025
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| Materias: | |
| Acceso en línea: | |
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| _version_ | 1866915211240275968 |
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| author | Cartea, Álvaro Sánchez-Betancourt, Leandro |
| author_facet | Cartea, Álvaro Sánchez-Betancourt, Leandro |
| contents | We model the trading activity between a broker and her clients (informed and uninformed traders) as an infinite-horizon stochastic control problem. We derive the broker's optimal dealing strategy in closed form and use this to introduce an algorithm that bypasses the need to calibrate individual parameters, so the dealing strategy can be executed in real-world trading environments. Finally, we characterise the discount in the price of liquidity a broker offers clients. The discount strikes the optimal balance between maximising the order flow from the broker's clients and minimising adverse selection losses to the informed traders. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2503_18005 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | A Simple Strategy to Deal with Toxic Flow Cartea, Álvaro Sánchez-Betancourt, Leandro Trading and Market Microstructure We model the trading activity between a broker and her clients (informed and uninformed traders) as an infinite-horizon stochastic control problem. We derive the broker's optimal dealing strategy in closed form and use this to introduce an algorithm that bypasses the need to calibrate individual parameters, so the dealing strategy can be executed in real-world trading environments. Finally, we characterise the discount in the price of liquidity a broker offers clients. The discount strikes the optimal balance between maximising the order flow from the broker's clients and minimising adverse selection losses to the informed traders. |
| title | A Simple Strategy to Deal with Toxic Flow |
| topic | Trading and Market Microstructure |
| url | https://arxiv.org/abs/2503.18005 |