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This reference price is also sometimes called intrinsic price. One of the simplest ways to improve it in regards to the mid-price (assuming you have the depth data) is the following: define a parameter: the size of a hypothetical market order. Let's say it's about the typical sum of first 3-10 order book levels of the instrument; execute a Buy order with ...


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That's the risk that MM's take, generally. This is commonly referred to as "gap risk". Holistically the idea is that with the law of large numbers you will lose sometimes but overall be OK as you have a large number of these trades. On our MM desk we have seen a few times where big takeovers were preceded by someone in the market lifting 10k call ...



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