Modeling & stabilization policies in financial systems

Relationships between (perceived) profit maximization strategies and stabilization policies of financial intermediaries in securities markets are investigated, and bases for developing quantitative models are established. Such model development forms a necessary first step in formulating a variety of interesting problems in stochastic games. In financial markets such as, for instance, the New York Stock Exchange, market makers (termed \´specialists\´ in the case of the NYSE) are employed for the purpose of insuring fair and orderly market clearing operations. Factors such as supply/demand imbalances tend to effect price fluctuations, and one of the primary tasks of the market maker is to stabilize the system in the face of such disturbances. The market maker serves as an agent for both buyer and seller, and in many cases (e.g., the NYSE is a prominent example) trades for his own account. This leads to several very interesting questions dealing with the formulation of "equitable" operating policies, the inference of actual operating policies from observed data, etc. Previous interest (e.g., see [1-6]) in such problems has been limited to developing statistical comparisons and qualitative discussions involving operational objectives, constraints, conjectures, etc. The approach employed in this paper is motivated somewhat by ideas such as in [7]; however, the extreme complexity of the problem consider ed herein does not at present allow the formalization of useful game theoretic situations.