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SUMMARY:Alexander Barzykin: Market-Making by a Foreign Exchange Dealer
DESCRIPTION:FX is a highly fragmented delocalized marketplace combining sig
 nificant OTC and open market segments. Dealers make money by providing liq
 uidity to clients while charging spread but face flow uncertainty and thus
  price risk. They can skew prices to attract directional flow but ultimate
 ly have to wait for clients to mitigate risk (internalization)\, or they c
 an trade with other dealers in the open market on demand to hedge their po
 sition and reduce their inventory (externalization). Better control associ
 ated with externalization comes with transaction cost and market impact. T
 he internalization vs. externalization dilemma has been a topic of recent 
 active discussion within the FX community. We offer an optimal control fra
 mework tackling both pricing and hedging thus constituting an important an
 d natural encounter between two problems that have attracted a lot of acad
 emic and practitioner’s interest in the last two decades: optimal market
  making and optimal execution. The model allows one to set optimal pricing
  ladder for different tiers\, or types of client flow\, and determine opti
 mal hedging rate in external liquidity pools as functions of the inventory
 \, risk aversion and market-driven parameters. In particular\, we have pro
 ven the existence of a pure flow internalization area\, or equivalently\, 
 an inventory threshold below which it is optimal for the dealer not to ext
 ernalize. We further generalize the model to a multi-currency portfolio an
 d provide an optimal solution taking into account correlations and crosses
 . Approximation techniques are proposed which make the framework scalable 
 to any realistic number of currency pairs.\nThe talk is based on joint wor
 k with Philippe Bergault and Olivier Guéant. More details can be found in
  the following references:\n1. Algorithmic market making in dealer markets
  with hedging and market impact\, https://doi.org/10.1111/mafi.12367\n2. M
 arket-making by a foreign exchange dealer\, https://www.risk.net/7952481\n
 3. Dealing with multi-currency inventory risk in FX cash markets\, https:/
 /arxiv.org/abs/2207.04100\n 
URL:https://www.imperial.ac.uk/events/156542/alexander-barzykin-market-maki
 ng-by-a-foreign-exchange-dealer/
DTSTART;TZID=Europe/London:20230124T140000
DTEND;TZID=Europe/London:20230124T150000
LOCATION:Room 410\, Huxley Building\, South Kensington Campus\, Imperial Co
 llege London\, London\, SW7 2AZ\, United Kingdom
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