I have a trend following market maker in a highly volatile market (XBTUSD) which makes its money from uninformed trades over a short time horizon. Sizing my bids/asks has always caused me to question my methodology. Currently, I'm just using a fixed leverage allocation weighted by the kelly criterion over a window of recent P/L such that it adjusts downwards in periods of bad performance.

I have experimented with measuring the current 'rate' of uninformed trades (which I took to be the volume/s of trades going in the wrong direction by some number of ticks, over a recent window of trades), but found that it lags behind the market, resulting in less variance P/L, but overall less ROI.

What is the best practice here?

  • $\begingroup$ i can't advise any specific method, but there are plenty of academic papers on market making inventory management and sizing $\endgroup$ – icherevkov Jan 16 '19 at 9:17
  • $\begingroup$ @icherevkov This is true, but none of them talk about how the quantity of uninformed traders in the market affects your optimal order sizes. $\endgroup$ – wildbunny Jan 16 '19 at 10:08
  • $\begingroup$ @wildbunny: this is late but check out marcos lopez deprado's PIN metric. I'm not sure if it's what you want but it sounds related. $\endgroup$ – mark leeds Mar 31 '19 at 4:14
  • $\begingroup$ @markleeds It's related but not quite what I'm after. I think the truth is a lot more subtle than just having a raw probability. In my experience the quantity of uninformed traders ebbs and flows throughout the day, which is why I tried to measure it directly. $\endgroup$ – wildbunny Apr 2 '19 at 8:29
  • $\begingroup$ gotcha. there was some serious controversy with pin in terms of a paper, critical of pin that came out, that marcos said was incorrect. Also, I sent a question to your web form but not sure if you received it. $\endgroup$ – mark leeds Apr 2 '19 at 14:01

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