18,662 research outputs found
Can maker-taker fees prevent algorithmic cooperation in market making?
In a semi-realistic market simulator, independent reinforcement learning
algorithms may facilitate market makers to maintain wide spreads even without
communication. This unexpected outcome challenges the current antitrust law
framework. We study the effectiveness of maker-taker fee models in preventing
cooperation via algorithms. After modeling market making as a repeated
general-sum game, we experimentally show that the relation between net
transaction costs and maker rebates is not necessarily monotone. Besides an
upper bound on taker fees, we may also need a lower bound on maker rebates to
destabilize the cooperation. We also consider the taker-maker model and the
effects of mid-price volatility, inventory risk, and the number of agents
QLAMMP: A Q-Learning Agent for Optimizing Fees on Automated Market Making Protocols
Automated Market Makers (AMMs) have cemented themselves as an integral part
of the decentralized finance (DeFi) space. AMMs are a type of exchange that
allows users to trade assets without the need for a centralized exchange. They
form the foundation for numerous decentralized exchanges (DEXs), which help
facilitate the quick and efficient exchange of on-chain tokens. All present-day
popular DEXs are static protocols, with fixed parameters controlling the fee
and the curvature - they suffer from invariance and cannot adapt to quickly
changing market conditions. This characteristic may cause traders to stay away
during high slippage conditions brought about by intractable market movements.
We propose an RL framework to optimize the fees collected on an AMM protocol.
In particular, we develop a Q-Learning Agent for Market Making Protocols
(QLAMMP) that learns the optimal fee rates and leverage coefficients for a
given AMM protocol and maximizes the expected fee collected under a range of
different market conditions. We show that QLAMMP is consistently able to
outperform its static counterparts under all the simulated test conditions
Learning to Manipulate a Financial Benchmark
Financial benchmarks estimate market values or reference rates used in a wide variety of contexts, but are often calculated from data generated by parties who have incentives to manipulate these benchmarks. Since the London Interbank Offered Rate (LIBOR) scandal in 2011, market participants, scholars, and regulators have scrutinized financial benchmarks and the ability of traders to manipulate them.
We study the impact on market welfare of manipulating transaction-based benchmarks in a simulated market environment. Our market consists of a single benchmark manipulator with external holdings dependent on the benchmark, and numerous background traders unaffected by the benchmark. We explore two types of manipulative trading strategies: zero-intelligence strategies and strategies generated by deep reinforcement learning. Background traders use zero-intelligence trading strategies. We find that the total surplus of all market participants who are trading increases with manipulation. However, the aggregated market surplus decreases for all trading agents, and the market surplus of the manipulator decreases, so the manipulator’s surplus from the benchmark significantly increases. This entails under natural assumptions that the market and any third parties invested in the opposite side of the benchmark from the manipulator are negatively impacted by this manipulation
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