Optimal market making with persistent order flow

Abstract

We address the issue of market making on electronic markets when taking into account the self exciting property of market order flow. We consider a market with order flows driven by Hawkes processes where one market maker operates, aiming at optimizing its profit. We characterize an optimal control solving this problem by proving existence and uniqueness of a viscosity solution to the associated Hamilton Jacobi Bellman equation. Finally we propose a methodology to approximate the optimal strategy.