Performative Market Making
Fuente:
arXiv
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| Autori principali: | , , |
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| Natura: | Preprint |
| Pubblicazione: |
2025
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| Soggetti: | |
| Accesso online: | |
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| _version_ | 1866912911704719360 |
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| author | Kleitsikas, Charalampos Leonardos, Stefanos Ventre, Carmine |
| author_facet | Kleitsikas, Charalampos Leonardos, Stefanos Ventre, Carmine |
| contents | Financial models do not merely analyse markets, but actively shape them. This effect, known as performativity, describes how financial theories and the subsequent actions based on them influence market processes, by creating self-fulfilling prophecies. Although discussed in the literature on economic sociology, this deeply rooted phenomenon lacks mathematical formulation in financial markets. Our paper closes this gap by breaking down the canonical separation of diffusion processes between the description of the market environment and the financial model. We do that by embedding the model in the process itself, creating a closed feedback loop, and demonstrate how prices change towards greater conformity to the prevailing financial model used in the market. We further show, with closed-form solutions and machine learning, how a performative market maker can reverse engineer the current dominant strategies in the market and effectively arbitrage them while maintaining competitive quotes and superior P&L. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2508_04344 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Performative Market Making Kleitsikas, Charalampos Leonardos, Stefanos Ventre, Carmine Trading and Market Microstructure Mathematical Finance Financial models do not merely analyse markets, but actively shape them. This effect, known as performativity, describes how financial theories and the subsequent actions based on them influence market processes, by creating self-fulfilling prophecies. Although discussed in the literature on economic sociology, this deeply rooted phenomenon lacks mathematical formulation in financial markets. Our paper closes this gap by breaking down the canonical separation of diffusion processes between the description of the market environment and the financial model. We do that by embedding the model in the process itself, creating a closed feedback loop, and demonstrate how prices change towards greater conformity to the prevailing financial model used in the market. We further show, with closed-form solutions and machine learning, how a performative market maker can reverse engineer the current dominant strategies in the market and effectively arbitrage them while maintaining competitive quotes and superior P&L. |
| title | Performative Market Making |
| topic | Trading and Market Microstructure Mathematical Finance |
| url | https://arxiv.org/abs/2508.04344 |