I have been taking a "Trading Strategies" course, but the experience is awful as the instructor barely provides any learning resources. I have an upcoming evaluation on market making algorithm using VBA ran on a trading simulator against other classmates, the goal is to basically to maximize PnL.

The case brief is here if you are interested in the details. https://people.ucalgary.ca/~sick/RITC/Cases/RIT%20-%20Case%20Brief%20-%20ALGO2%20-%20Algorithmic%20Market%20Making.pdf

I am trying to find the optimal strategies for MM, and I have the following questions

  1. To earn spread & rebate, I always submit a pair of bid and offer orders. However, they may not be filled, which will lead to inventory risk. What is the best way to hedge against this risk?

  2. what price of limit orders should I submit at to maximize my chance of order getting filled?

  3. In general, what's the best strategy for dealing with this simplified version of MM case


1 Answer 1


Check out Avellaneda and Stoikov (2008)

They model the market maker's problem in a very neat and easy to code way. Some caveats of the model, in case you do decide to use it:

  1. The price process is the simplest one possible, does not consider drift or market impact of your orders;

  2. Orders that are not executed are cancelled at the end of each time step (this has no cost to you, but it is something to pay attention to when you are trading, so as to not 'forget' orders in the book.


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