Questions tagged [market-making]
Market makers provide liquidity to the market by quoting bid and ask prices for most of the time. The pricing in absolute terms is not as important as finding relative mispricing. The market microstructure is often used to develop trading strategies.
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How to calculate average entry price for perpetual swap contracts?
I'm trying to calculate the average entry price for perpetual swap contracts for use in back-testing a trading strategy, as per Bitmex's documentation:
A Perpetual Contract is a derivative product ...
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Implementing Hanson`s LMSR with Limit Orderbooks
I am trying to integrate Hanson's LMSR (see (see logarithmic market scoring rule)into an order-book with traditional bid/ask-limit orders (in KDB+/Q).
The following functions define the basic LMSR ...
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High Frequency Market Making When Short Selling Is Prohibited
I am seeking insights on high-frequency market making strategies in markets where short selling is prohibited. While browsing through research papers and quant.stackexchange.com, there's frequent ...
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What's the typical markup on quoted exotics, and what drives this premium?
I'm curious about the typical markup on quoted exotic options as well as what drives this premium.
You call up an options desk for a quote, and they'll give you a spread that reflects their market on ...
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Understanding the calibration of High-frequency trading in a limit order book
I am trying understand and replicate this thesis, which is based on, High-frequency trading in a limit order book by (Avellaneda and Stoikov, 2008) and Optimal market making, by Olivier Gueant, 2017, ...
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Dealing with the inventory risk: solution with drift
I'm implementing the solution with drift from "Dealing with the inventory risk" from Gueant, Lehalle and Tapia. I'm using the link https://arxiv.org/pdf/1105.3115.pdf as reference.
I can ...
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Delta of FX Options, Different Currency in Trading Book - Trading Interview Question
Having done stochastic analysis in university, together with tons of other math courses, do never prepare you for an actual interview in trading. Stumbled on what I believe might be an easy question, ...
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Has work been done on PID controllers for optimal trading?
Commonly, stochastic control is the basis for optimal trading (either in execution or market-making). Has any research been done (or why not, if none) as to PID controllers for these applications?
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How market makers exit their position?
A market maker needs to quote a bid and ask whatever its vision on the stock is. But what happens in the case of panic-selling on a particular stock?
The market maker is thus going to buy a lot of ...
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Why does total spread increase as the number of market maker increases?
In the paper Bastien Baldacci, Dylan Possamaï, Mathieu Rosenbaum, Optimal make take fees in a multi market maker environment(https://arxiv.org/pdf/1907.11053.pdf), the total spread is increased to ...
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Market Making Card Sum Game
I am preparing for an interview with a prop trading firm and wanted to discuss potential strategies for the classic market making games. I have seen similar posts on the forum, but a lot of the ...
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Market making in linear products, analogous to a short straddle under simplifying assumptions?
To preface, I am not a market-maker or trader, but I have an ok understanding of options and classic vanilla option theory.
For a market maker providing quotes at a single level (i.e 99 bid - 101 ...
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Parameters of Avellaneda-Stoikov inventory strategy
Consider the reserve price from the algorithm:
$$
r(s, t) = s - q\gamma \sigma^2(T-t)
$$
where $s$ is the initial value of mid-price on the market, $q$ is a number of stocks that trader has, $\gamma$ ...
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How an Option market-makers make money?
This might be a very broad question, but I would like if someone can please explain to me how a market makers make money in Options market ? Thank you
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Why are prediction markets based on logarithms when a linear solution can suffice?
For example, take a binary outcome; A coin toss, heads or tails.
If heads, then those that picked heads receive \$1 and tails receive \$0.
To quote the prices for each bet Hanson's LMSR uses ...
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What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?
What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
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How to weigh computational cost of updating an online predictive model for latency-constrained trading (e.g., market making, HFT)?
Say one has a predictive online model for market making or HFT (or just for anything strictly latency-constrained). In my specific example, I start with a Gaussian distribution over the "true value" ...
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Optimal stochastic control for geometric brownian motion with numerical solution?
Does anyone know of a Avellaneda and Stoikov alike model for geometric brownian motion which also has easy to read numerical solutions for the bid/ask prices?
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Approximating Market Making PnL with a Trend Following Strategy
In an interview about the setting up AHL Michael Adams made the following quote (the quote relates to their pre AHL days when they acted as consultants):
I think because we we
re doing work for ...
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How does a Broker-Dealer lend shares to other Broker-Dealers?
Is it possible to find out how a OTC Broker-Dealer in thinly-traded equities lends shares for short-sales to other Broker-Dealers. Which platform or process is involved?
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Historical list of Primary Dealers in Europe
I would be interested in a list of all the banks and financial institutions that have been Primary Dealers in the European Union from the 1980s until today. For a current list you can check this pdf ...
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Guidance on Execution Algo Passive order placer?
Could someone help with any relevant literature about building an Execution Algo and things to consider and keep in mind for optimal passive order placements? There are basic algos like TWAP/VWAP/POV ...
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how does prediction markets automated market makers work with examples?
I am trying to replicate the prices in prediction markets
For example on below manifold calculates, how does new probability and payout estimate changes on manifold
or on Futuur example similarly, ...
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Fitting k from Avellaneda but the curve is not exponential
I am trying to fit kappa for a ticker. I am using 5 days of data to illustrate how this can be done, which isn't that much data but I think is sufficient to show my problem. This data however appears ...
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Downloaded data is quote-driven or order-driven?
I downloaded data from Refinitiv Datastream (But I think that you get the same data from Bloomberg) to write my thesis. I downloaded prices and volumes.
I have a crucial question now: Are the prices ...
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Privatelink latency impact
I am working with a team on a market making algorithm on Huobi. We are integrating our infrastructure in AWS and when you are a S tier you can get a privatelink which is about 10 to 50 ms faster than ...
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at what frequency do option market makers delta hedge
Could someone with option market making experience tell me usually at what frequency do the major option market makers delta-hedge their positions (say for US single stocks or equity indices)? ...
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In Avellaneda-Stoikov market making, what is the difference between "reservation prices" and "optimal bid ask quotes"?
Question
What is the difference between "reservation price" and "optimal bid and ask quotes"?
Are they the same thing?
(1) Reservaton price
In the paper High-frequency trading ...
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Market making algo using bid ask order volume ladder
I am looking for references for market-making strategies using bid-ask order ladder. Algo should suggest entry prices, and do inventory management. I am more interested in practical simple algo used ...
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How to derive the HJB equation under this paper's context?
I'm reading this paper:High frequency trading in a limit order book.
IN section 3.1, an HJB equatioin was given without any details. Could anyone show how to arrive this equation step by setp? I have ...
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What is "risk-hit ratio"?
In this article https://www.risk.net/awards/7741391/flow-market-maker-of-the-year-citadel-securities describing Citadel Securities the market maker, it says
The firm’s electronically executed US ...
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How do you detect order execution algorithms?
Most large orders nowadays are done through TWAP or VWAP based order execution. For example, if Alice wants to sell $60 million in EURUSD she will break up her order into 50,000 tiny orders and then ...
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Market making future and underlying spot
I am learning about market making and have been reading papers by Avellaneda-Stoikov, Bayraktar-Ludvkosli and L-Guéant-Fernandez. All of them attempt to maximize utility function but are based on a ...
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What variables are used for the Institutional Activity Index (IAI)?
I've been looking for various ways to get more information about institutional trade action. Although weekly COT report is available, it's already outdated by 1 week at the time the report come out ...
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Optimal control for pairs trading?
My trading scenario is essentially pairs trading 'identical' futures pairs from different exchanges, similar to arbitrage but for futures.
One side is entered with limit orders and the opposite side ...
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Certifications or training for a market maker
Are there any schools or certifications that will teach you a "market maker 101" type of course? I was thinking of using some of the FINRA study materials as if I was going to take the Series 57 but ...
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Predicting midprice of FX pair increases in exchange Y if it increases in exchange X
I want to make a predictive model to see if the mid-price of P (FX Pair) increases in Exchange X that P will increase in Exchange Y within n seconds with a certain statistical confidence.
Exchange X ...
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Evaluating passive fills
Assume we look at all passive fills going through a security. How do we benchmark how good each passive fill is (relative to each other)?
We expect the edge to be (assuming midprice is our ...
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Market imbalance measures for market making
The paper An Electronic Market-Maker define the market order imbalance as follows:
We will define the order imbalance as the total excess demand size
since the last change of quote by the market ...
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Optimal Multi-Level Quoting for Market Making
I have been studying limit order books with focus on the optimal quoting problem for market makers. I have read the Avellaneda-Stoikov model and the subsequent developments. However I am unable to ...
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Market Making why using the exponential utility function
In High-frequency trading in a limit order book by MARCO AVELLANEDA and SASHA STOIKOV they say that the MM wants to maximize the following function:
$$v(x, s, q, t) = E[-exp(- \gamma(x+qS_T)] $$
Is ...
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How to model the imbalance to predict in different timeframes?
As widely shown in this forum and in the literature, the order book imbalance is empirically a good predictor of the market move.
However, even though the calculation of the imbalance is very straight ...
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Gueant–Lehalle–Fernandez-Tapia formulas for varying volatility
There are formulas proposed by Gueant–Lehalle–Fernandez-Tapia related to the optimal bid and ask in market-making models (Optimal Market Making by Gueant or The Financial Mathematics of Market ...
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Market Maker Dynamics and RFQ
In the fixed income space, market makers, such as banks, often utilize platforms like TradeWeb. I'm seeking a clearer understanding of the workflow involved in this process.
From my current ...
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Combination of bid ask of two instruments
You have 2 instruments: X in which you are quoting 35 @ 40 and product Y in which you are quoting 15 @ 30. We want to make a market on the product X+Y. What is the bid-ask spread you will quote?
Got ...
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Calculating Volatility in the Avellaneda and Stoikov Model
I'm looking to understand the approach for calculating volatility (σ^2) within the context of the Avellaneda and Stoikov market-making model. I have a few specific questions on this topic:
Return Type:...
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Can you trade options with market scoring rules?
In a double-auction market, buyers and sellers are always balanced in number -- a traditional market-maker in such markets doesn't really hold any assets/take any position long-term.
However, with a ...
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Exploring order cancellation techniques in high-frequency market making
I'm interested in gaining a better understanding of order cancellation techniques in high-frequency market making. What are the different approaches to order cancellation that are commonly used in HFT ...
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Liquidity Rebate
I have one question regarding the liquidity rebate that liquidity providers receive. I've read on investopedia that it refers to the traders/investors who place limit orders since they then "...
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Kyle model for market-maker price
Now I make research about market making for cryptocurrency. I’m using model like Avellaneda-Stoikov for optimal control inventory, and I can’t understand how to find S(t) price. Of course, taking the ...