(NY) - Hongzhong Zhang - Intraday Market Making with Overnight Inventory Costs
Details
Intraday Market Making with Overnight Inventory Costs
Hongzhong Zhang
Seminar Program
5:45pm Registration
6:00pm Seminar
7:30pm Reception
Abstract
The share of market making conducted by high-frequency trading (HFT) firms has been rising steadily. A distinguishing feature of HFTs is that they trade intraday, ending the day flat. To shed light on the economics of HFTs, and in a departure from existing market making theories, we model an HFT that has access to unlimited leverage intraday but must fund any end-of-day inventory at an exogenously determined cost. Even though the inventory costs only occur at the end of the day, they impact intraday price and liquidity dynamics. This gives rise to an intraday endogenous price impact mechanism. As time approaches the end of the trading day, the sensitivity of prices to inventory levels intensifies, making price impact stronger and widening bid-ask spreads. Moreover, imbalance of buy and sell orders may catalyze hikes and drops of prices, even under fixed supply and demand functions. Empirically, we show that these predictions are borne out in the U.S. Treasury market, where bid-ask spreads and price impact tend to rise towards the end of the day. Furthermore, price movements are negatively correlated with changes in inventory levels as measured by the cumulative net trading volume.
(Joint work with Tobias Adrian, Agostino Capponi, and Erik Vogt)
Biography
Hongzhong Zhang is an associate research scientist at IEOR department of Columbia University, working on applied math problems related to high frequency trading, financial stability, and systemic risk. Before that, Hongzhong Zhang was an assistant professor at Statistics department of Columbia University, conducting research and teaching in statistics, stochastic processes with applications in finance. Dr. Zhang received a PhD in mathematics from City University in New York in 2010.
Disclaimer
This a joint IAQF/Thalesians seminar, and not an instructional program of New York University.