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Specifically, FX market making.
I am not exactly looking for market-making strategies, but rather when once a market-maker has assumed a net position in a currency spot trading market, what are some optimal ways of hedging that position, measures of exposure, how often the hedge should be rebalanced optimizing to reduce transaction costs etc.
Any pointers to books or papers are appreciated!
take a look at Giles Jewitt's "FX Derivatives Trader School". A clear, concise yet exhaustive read. Highly recommend.
Have a look at FORM S-1 Securities Registration Statement by Virtu Financial, Inc. as filed with the Securities and Exchange Commission on March 10, 2014:
Virtu is a leading technology-enabled market maker and liquidity provider to the global financial markets. $\ldots$ We make markets by providing quotations to buyers and sellers in more than 10,000 securities and other financial instruments on more than 210 unique exchanges, markets and liquidity pools in 30 countries around the world.
In particular they make market in global Currencies (including futures contracts in FX) at CME, ICE, Currenex, EBS, HotSpot, Reuters, FXall and LMAX.
They describe their approach as follows:
We refer to our market making activities as being "market neutral," which means that we are not dependent on the direction of a particular market and do not speculate. Our market making activities are designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our strategies are also designed to lock in returns through precise and nearly instantaneous hedging, as we seek to eliminate the price risk in any positions held. Our revenue generation is driven primarily by transaction volume across a broad range of securities, asset classes and geographies. We avoid the risk of long or short positions in favor of earning small bid/ask spreads on large trading volumes across thousands of securities and other financial instruments. We do not engage in the types of principal investing and predictive, momentum and signal trading in which many other broker-dealers and trading firms engage.
Their results are impressive:
The chart below illustrates our daily Adjusted Net Trading Income from January 1, 2009 through December 31, 2013. As a result of our real-time risk management strategy and technology, we had only one losing trading day during the period depicted, a total of 1,238 trading days.
