Signature Methods for Optimal Market Making

Abstract

We propose a signature-based method to solve the optimal market-making problem under a mean-variance criterion. By exploiting signature linearization techniques, we reduce the market-making problem to a pseudo-linear optimization over the expected signature of an augmented market path, and we develop a signature algorithm named Sig-REINFORCE to learn the optimal bid and ask quotes. We test our method in two scenarios, in which market-order arrivals follow either a Poisson or a self-exciting Hawkes process, and we benchmark it against a Proximal Policy Optimization (PPO) baseline.