2
$\begingroup$

Baron Law, Frederi Viens: Market Making under a Weakly Consistent Limit Order Book Model contains the following paragraph

"The market maker may achieve her target execution profile by continuously adjusting her limit orders in the LOB to be roughly the proportion ρ of the queue length at each price level, but the detailed mechanism is outside the scope of this paper."

Does anyone have any references for how this is achieved in practice given the presence of both trades and cancels removing depth at the best prices?

$\endgroup$

2 Answers 2

4
$\begingroup$

Suppose your target participation rate is 1/11 ~ 9%. At each price level, whenever someone puts a limit order of size 10, you put a limit order of size 1 right after him. Whenever someone cancel an order of size 10, you cancel 1 share from your limit order with the lowest priority. When a market order arrives, you adjust your limit orders depending on whether your limit orders are executed or not.

However, I would like to stress that the uniform distribution assumption is more like a simplifying assumption, rather than the goal, in deriving the optimal risk limit in my paper. As a market-maker, you always want your limit orders to be at the top of the queue.

$\endgroup$
0
$\begingroup$

I also wonder if targeting uniform distribution is better than clustering at the top of the queue in some cases. For example, if bid orders are distributed uniformly, when a bid order is filled, the next bid order will be filled at a short time with relatively low probability. In the meanwhile, if the ask order of the market maker with the same size is filled, then the market maker’s position is stilled zero. Instead, if all bid orders are clustering at the top, they may be filled together by a large market sell order, resulting in a large risk exposure with long position. In the sense of risk, is uniform distribution better, though it is difficult to achieve.

$\endgroup$
2
  • $\begingroup$ As it’s currently written, your answer is unclear. Please edit to add additional details that will help others understand how this addresses the question asked. You can find more information on how to write good answers in the help center. $\endgroup$
    – Community Bot
    Nov 4, 2023 at 1:50
  • $\begingroup$ If you have a new question, please ask it by clicking the Ask Question button. Include a link to this question if it helps provide context. - From Review $\endgroup$
    – Alper
    Nov 5, 2023 at 21:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.