Deep Recurrent Q-Networks for Market Making

Market Making is high frequency trading strategy in which an agent provides liquidity simultaneously quoting a bid price and an ask price on an asset. Market Makers reaps profits in the form of the spread between the quoted price placed on the buy and sell prices. Due
to complexity in inventory risk, counterparties to trades and information asymmetry, understating of market making algorithms is relatively unexplored by academicians across disciple. In this paper, we develop realistic simulations of limit order markets and use it to design a market making agent using Deep Recurrent Q-Networks. Our approach outperforms
a prominent benchmark strategy from literature, which uses temporal-difference reinforcement learning to design market maker agents. The agents successfully reproduce stylized facts in historical trade data from each simulation.