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Whereas when you marketmake on a last-look basis: - You, the marketmaker, are sending indicative prices to the ECN - The ECN sends orders to you and is at risk (since you have the option to reject, hopefully rarely) When you marketmake on a no-last-look (NLL) basis: - the ECN is sending indicative prices - You, the marketmaker, send orders to the ECN and ...

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To answer your question: I mean in a theoretical sense: If we have a particular market model (which I guess we may assume is complete or frictionless if need be) where shorting and fractional purchases are allowed, does presence of arbitrage necessarily make all kinds of derivatives have zero value? The answer is no. See example below. Went over your ...

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I am also interested in the answer to this question, and would like to expand a little bit on it as well. First of all, let me add some value in terms of a partial answer: There are restrictions on when short selling is allowed. According to the SEC, and the "Alternative Uptick Rule" short selling is not allowed on "a stock that has dropped more than 10 ...

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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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What if you write $$P[R_{n+1} = d|F_n] = 1 - P[R_{n+1} = u|F_n] ?$$ Let us write $P(u) = P[R_{n+1} = u|F_n]$ Then the part to show is $$u \bar{S}_n P(u) + d \bar{S}_n (1-P(u))$$ and this $$\bar{S}_n \left(d +(u-d)P(u) \right),$$ where we just expanded terms and then extracted the coefficients.

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