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Optimal Liquidity Provision (1309.5235v3)
Published 20 Sep 2013 in q-fin.TR, math.OC, math.PR, and q-fin.PM
Abstract: A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration.