Frontiers of Computer Science

, Volume 8, Issue 4, pp 596–608 | Cite as

An intelligent market making strategy in algorithmic trading

  • Xiaodong Li
  • Xiaotie Deng
  • Shanfeng Zhu
  • Feng WangEmail author
  • Haoran Xie
Research Article


Market making (MM) strategies have played an important role in the electronic stock market. However, the MM strategies without any forecasting power are not safe while trading. In this paper, we design and implement a twotier framework, which includes a trading signal generator based on a supervised learning approach and an event-driven MM strategy. The proposed generator incorporates the information within order book microstructure and market news to provide directional predictions. The MM strategy in the second tier trades on the signals and prevents itself from profit loss led by market trending. Using half a year price tick data from Tokyo Stock Exchange (TSE) and Shanghai Stock Exchange (SSE), and corresponding Thomson Reuters news of the same time period, we conduct the back-testing and simulation on an industrial near-to-reality simulator. From the empirical results, we find that 1) strategies with signals perform better than strategies without any signal in terms of average daily profit and loss (PnL) and sharpe ratio (SR), and 2) correct predictions do help MM strategies readjust their quoting along with market trending, which avoids the strategies triggering stop loss procedure that further realizes the paper loss.


algorithmic trading market making strategy order book microstructure news impact analysis market simulation 


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Copyright information

© Higher Education Press and Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • Xiaodong Li
    • 1
  • Xiaotie Deng
    • 2
    • 3
  • Shanfeng Zhu
    • 3
    • 4
  • Feng Wang
    • 5
    Email author
  • Haoran Xie
    • 6
  1. 1.Department of Computer ScienceCity University of Hong KongHong KongChina
  2. 2.AIMS Lab, Department of Computer Science and EngineeringShanghai Jiaotong UniversityShanghaiChina
  3. 3.Shanghai Key Lab of Intelligent Information ProcessingFudan UniversityShanghaiChina
  4. 4.School of Computer ScienceFudan UniversityShanghaiChina
  5. 5.State Key Lab of Software Engineering, School of Computer ScienceWuhan UniversityWuhanChina
  6. 6.Department of Computer ScienceHong Kong Baptist UniversityHong KongChina

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