Strategic OTC market making with reputation feedback
arXiv:2607.11328
The paper builds a stochastic‑control model of OTC market making where a dealer’s reputation, measured by RFQ win and fill ratios, influences future order flow, creating a trade‑off between short‑term spread earnings and long‑term franchise value.
Abstract
Electronic over-the-counter (OTC) liquidity provision is increasingly shaped not only by the price of the next quote, but also by a dealer's accumulated standing with clients and platforms. We develop a stochastic-control model in which request-for-quote (RFQ) win ratios and streaming fill ratios feed back into future flow through performance-based flow gates, creating an explicit trade-off between immediate spread capture and long-term franchise value. The resulting policy naturally alternates between reputation-building campaigns and franchise monetization phases, and can generate multiple stable client-flow regimes even in a parsimonious single dealer control problem.