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Reinforcement Learning in Market Making is a project that explores the application of RL techniques to develop market-making strategies, comparing them with baseline approaches and conducting experiments on real-world data.

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Reinforcement Learning in Market Making

This project focuses on utilizing reinforcement learning techniques to develop market-making strategies.

Overview

  • Created a trading simulator that includes execution and market data latencies, providing a more realistic testing environment for various market making strategies.
  • Implemented the Avellaneda-Stoikov strategy as a baseline for comparison and designed a deep reinforcement learning strategy using the Actor-Critic (A2C) algorithm.
  • Conducted extensive experiments on high-frequency data to demonstrate the effectiveness of the reinforcement learning approach, while also identifying its limitations.

Baselines

  • Naive Strategy: At each time step, place buy and sell orders at the best available price level.
  • Avellaneda-Stoikov Strategy (paper link)

RL Strategy

Environment State Space

  • Price Level Distance to Midpoint
  • Cumulative Notional Value at Price Level
  • Notional Imbalances
  • Order Flow Imbalance
  • Custom RSI
  • Spread

Agent State Space

  • Inventory Ratio
  • Total PnL

Action State Space

Action State Space

Reward Function and Training Method

  • Positional PnL with inventory penalty Positional PnL
  • Advantage Actor-Critic (A2C). The A2C update is calculated as The A2C Update

Function Approximator

NN Architecture

Experiments

Environment

  • Execution Latency: 10ms
  • Market Data Latency: 10ms
  • Maker Fee: -0.004%
  • All orders are Post-Only type

Methodology

  • Data:
    • BTC/USDT: HFT data for June 23, 2022 (approximately 2.5 million snapshots)
    • ETH/USDT: HFT data from January 2, 2023, to January 4, 2023 (approximately 1.3 million snapshots)
  • Train-Test Split:
    • BTC/USDT: Train - first three hours of data, Test - remaining 21 hours
    • ETH/USDT: Train - first six hours of data, Test - remaining 1 day and 13 hours

Results

  • BTC: BTC Results
  • ETH: ETH Results

Conclusions

  • Developed a reinforcement learning-based strategy for market making.
  • Evaluated the effectiveness of the strategy on real-world data compared to two classical approaches: naive strategy and Avellaneda-Stoikov strategy.
  • Limitations of the RL approach include the need for algorithm training, which requires significant time and computational resources, a large number of hyperparameters that impact the final results and need to be tuned, and the inference speed of the RL strategy.

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Reinforcement Learning in Market Making is a project that explores the application of RL techniques to develop market-making strategies, comparing them with baseline approaches and conducting experiments on real-world data.

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