A Utility Framework for Bounded-Loss Market Makers

Understand

We introduce a class of utility-based market makers that always accept orders at their risk-neutral prices.

• We derive necessary and sufficient conditions for such market makers to have bounded loss.
• We prove that hyperbolic absolute risk aversion utility market makers are equivalent to weighted pseudospherical scoring rule market makers.
• In particular, Hanson's logarithmic scoring rule market maker corresponds to a negative exponential utility market maker in our framework.