4
$\begingroup$

Implementing Hanson's Market Maker states:

If the market maker wants to quote a "current price", he can. The current price for outcome 1 is:

$$ \mbox{price1} = \frac{e^{\frac{q1}{b}}}{e^{\frac{q1}{b}} + e^{\frac{q2}{b}}} $$

Why this is the case? Is it just some simple "see-saw" algorithm? Exert pressure on one side and it will simply radiate across into the corresponding +/- price change?

I am asking in the context of writing a simple market-making algorithm to offer bids and quotes (on a virtual market), but this seems too simple.

Improve this question
$\endgroup$
2
  • 1
    $\begingroup$ Is this related to your university project? $\endgroup$
    – chrisaycock
    Apr 24, 2013 at 19:55
  • $\begingroup$ Its related to the algorithm I linked to in the question. $\endgroup$
    – user997112
    Apr 24, 2013 at 20:33

1 Answer 1

Reset to default
1
$\begingroup$

It does create a see-saw. This can be reduced by having it charge a slightly bigger spread, which gets contributed to b. In this way, b effectively becomes a market making fund, and volatility decreases as trade volume increases. This makes the LMSR market maker liquidity sensitive.

This makes the market more efficient as spreads decrease over time as trading imparts price knowledge and subsidizes liquidity.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.