Overview

This is a study of the Glosten and Milgrom model for market making.

Experiment 01

This chart shows the true price and market price over a period of 25 time steps:

Experiment 02

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 10 time steps:

Experiment 03

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 25 time steps:

Experiment 04

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 25 time steps:

Experiment 05

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 25 time steps:

Experiment 06

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 25 time steps:

Experiment 07

This chart shows the true price and market price over a period of 25 time steps:

This chart shows the market maker's belief about the price after 25 time steps:

References

• Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders by Lawrence R. Glosten and Paul R. Milgrom

• A Learning Market-Maker in the Glosten-Milgrom Model by Sanmay Das

• Market Microstructure Theory by Maureen O'Hara

• An Intuitive (and Short) Explanation of Bayes' Theorem by Kalid Azad