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Questions tagged [market-making]

Market makers provide liquidity to the market by quoting bid and ask prices for most of the time. The pricing in absolute terms is not as important as finding relative mispricing. The market microstructure is often used to develop trading strategies.

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option pricing under perpetual features long and short funding rate

We have perpetual futures market and we want to use it for hedging our option. On perpetual futures you pay long funding fee, if you go long or short funding fee if you go short. (The funding fee can ...
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Market Making in practice

I read some of the papers in the market making literature such as: Avellaneda - Stoikov market making model but was wondering if these types of models are actually use in pratice? It seems that when ...
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Units in the Avellaneda and Stoikov Model

The Avellaneda-Stoikov model calculates the optimal bid and ask prices. The reservation prices are given by: $$s(q_t, t, T, \sigma_{(t+p)}^2, \gamma) = q_t \gamma \sigma_{(t+p)}^2 (T - t)$$ Where $I_{...
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Market make when the orderbook has very few orders/volume in it? (price is stable at $10) [closed]

Imagine a stock that's very unpopular, to the point where there'll only be on average 4 units of the stock at any given moment in the orderbook. This stock is also stable at a price of \$10 (meaning ...
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Market Making in ETF, how the hedging is typically done

I was wondering how Market Makers in ETF hedge themselves. I believe that they don't buy the underlying basket because some of the stocks could be extremely illiquid. So my guess is that they buy CALL/...
option_vol's user avatar
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Tiering value in RFQ

I was wondering what are typical strategies employed by market making firms to calculate the tiering value of each client. So when a client create an RFQ, the market maker after calculating the BID/...
missing_name's user avatar
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Why are Black-Scholes derived greeks used for risk management when alternatives exist?

To my understanding, it is still quite common for market makers of vanilla options to use Black-Scholes greeks. My concern with this is best expressed by Pat Hagan in the original SABR model paper: &...
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Market-Making stocks with random inventory exposure

In the traditional case of stock market-making, a market-maker calculates optimal bid-ask quotes which are based on various variables like current inventory, spot price, volatility etc. The market-...
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Using regression to find optimal parameters for a trading strategy based on market regime

I am still fairly new to the field so forgive me if the whole post and my questions sound stupid. A bit of explanation first. So i have a trading strategy which is an extension of an Avellaneda-...
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Optimal Multi-Level Quoting for Market Making

I have been studying limit order books with focus on the optimal quoting problem for market makers. I have read the Avellaneda-Stoikov model and the subsequent developments. However I am unable to ...
user50123's user avatar
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High Frequency Market Making When Short Selling Is Prohibited

I am seeking insights on high-frequency market making strategies in markets where short selling is prohibited. While browsing through research papers and quant.stackexchange.com, there's frequent ...
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Market Making why using the exponential utility function

In High-frequency trading in a limit order book by MARCO AVELLANEDA and SASHA STOIKOV they say that the MM wants to maximize the following function: $$v(x, s, q, t) = E[-exp(- \gamma(x+qS_T)] $$ Is ...
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Understanding the calibration of High-frequency trading in a limit order book

I am trying understand and replicate this thesis, which is based on, High-frequency trading in a limit order book by (Avellaneda and Stoikov, 2008) and Optimal market making, by Olivier Gueant, 2017, ...
ayamathss1's user avatar
2 votes
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How market makers exit their position?

A market maker needs to quote a bid and ask whatever its vision on the stock is. But what happens in the case of panic-selling on a particular stock? The market maker is thus going to buy a lot of ...
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Guidance on Execution Algo Passive order placer?

Could someone help with any relevant literature about building an Execution Algo and things to consider and keep in mind for optimal passive order placements? There are basic algos like TWAP/VWAP/POV ...
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How to model the imbalance to predict in different timeframes?

As widely shown in this forum and in the literature, the order book imbalance is empirically a good predictor of the market move. However, even though the calculation of the imbalance is very straight ...
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Gueant–Lehalle–Fernandez-Tapia formulas for varying volatility

There are formulas proposed by Gueant–Lehalle–Fernandez-Tapia related to the optimal bid and ask in market-making models (Optimal Market Making by Gueant or The Financial Mathematics of Market ...
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Market Maker Dynamics and RFQ

In the fixed income space, market makers, such as banks, often utilize platforms like TradeWeb. I'm seeking a clearer understanding of the workflow involved in this process. From my current ...
hjkhkjhjk's user avatar
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How does one calibrate lambda in a Avellaneda-Stoikov market making problem leading to Gueant-Lehalle-Tapia model?

The title is similar to that of the question I was referred to here which has been answered by Lehalle himself! I'm trying to implement the Gueant-Lehalle-Tapia model which is how I got to this answer ...
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Market Makers how can they sell an asset they don't have

I'm having trouble grasping the operations of market makers. For example, consider Bank XYZ, which has set a bid-ask spread for T-Bond A at $90.1 (bid) - 90.2 (ask)$. Suppose a client of the bank ...
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Trade Impulse signal

https://blog.headlandstech.com/2017/08/03/quantitative-trading-summary/ In reference to the link, under Market Microstructure Signals, the so called "Trade Impulse" signal was mentioned . ...
emptydoubleu's user avatar
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Multi level micro price

Typical micro price formula uses the top of book depth (i.e. level 1 depth): Microprice = (BidSize x AskPrice + AskSize x BidPrice) / (BidSize + AskSize) But how does one actually include more depth ...
emptydoubleu's user avatar
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Why does total spread increase as the number of market maker increases?

In the paper Bastien Baldacci, Dylan Possamaï, Mathieu Rosenbaum, Optimal make take fees in a multi market maker environment(https://arxiv.org/pdf/1907.11053.pdf), the total spread is increased to ...
EdisonKIng's user avatar
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Is stochastic control with the HJB equation used in market making/algo trading at institutions?

In chapter 5 of https://www.maths.ed.ac.uk/~dsiska/LecNotesSCDAA.pdf, they use stochastic control and the Hamiltonian Jacobi Bellman (HJB) equation in attempt to measure bid-ask spreads and optimal ...
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Checking short term supply and demand in the stock market

I am implementing a pretty simple market making strategy. I want to see if the demand is higher than the supply in the short term so that I will be able to buy and sell decently fast. My goal is to be ...
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Combination of bid ask of two instruments

You have 2 instruments: X in which you are quoting 35 @ 40 and product Y in which you are quoting 15 @ 30. We want to make a market on the product X+Y. What is the bid-ask spread you will quote? Got ...
Kai's user avatar
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how does prediction markets automated market makers work with examples?

I am trying to replicate the prices in prediction markets For example on below manifold calculates, how does new probability and payout estimate changes on manifold or on Futuur example similarly, ...
adam's user avatar
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Calculating Volatility in the Avellaneda and Stoikov Model

I'm looking to understand the approach for calculating volatility (σ^2) within the context of the Avellaneda and Stoikov market-making model. I have a few specific questions on this topic: Return Type:...
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Market Making Card Sum Game

I am preparing for an interview with a prop trading firm and wanted to discuss potential strategies for the classic market making games. I have seen similar posts on the forum, but a lot of the ...
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Market making in linear products, analogous to a short straddle under simplifying assumptions?

To preface, I am not a market-maker or trader, but I have an ok understanding of options and classic vanilla option theory. For a market maker providing quotes at a single level (i.e 99 bid - 101 ...
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Where can I learn more about market-making strategies? [duplicate]

I have some experience trading both sides of an order book, but not simultaneously in the same security (and certainly not at the size large market makers do.) I've searched pretty extensively for ...
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Parameters of Avellaneda-Stoikov inventory strategy

Consider the reserve price from the algorithm: $$ r(s, t) = s - q\gamma \sigma^2(T-t) $$ where $s$ is the initial value of mid-price on the market, $q$ is a number of stocks that trader has, $\gamma$ ...
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Can you trade options with market scoring rules?

In a double-auction market, buyers and sellers are always balanced in number -- a traditional market-maker in such markets doesn't really hold any assets/take any position long-term. However, with a ...
Abhimanyu Pallavi Sudhir's user avatar
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1 answer
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How to make markets for highly liquid assets?

I'm looking at the level-2 data of some ETFs and trying to figure out whether it's possbile to design a market making strategy. When looking at the data, I find these ETFs to be highly liquid: at the ...
autoencoder's user avatar
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1 answer
320 views

Fitting k from Avellaneda but the curve is not exponential

I am trying to fit kappa for a ticker. I am using 5 days of data to illustrate how this can be done, which isn't that much data but I think is sufficient to show my problem. This data however appears ...
Oliver Xu's user avatar
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If a market maker wanted to avoid filling option orders from a specific account, what information could they use?

FIX has a few fields that do or could contain identifying information for equity option orders, the “Actionable Identifier” field in particular, although the OCC states here that “It will not be ...
opq's user avatar
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ETF Market Making Hedging

Suppose I am a market maker making a market on an S&P ETF. Suppose that I have calculated a fair ETF price of $395. My market therefore is 394.90 (bid) and 395.1 (ask). After my bid is posted I ...
techhead2000's user avatar
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1 answer
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Dealing with the inventory risk: solution with drift

I'm implementing the solution with drift from "Dealing with the inventory risk" from Gueant, Lehalle and Tapia. I'm using the link https://arxiv.org/pdf/1105.3115.pdf as reference. I can ...
sandstorm111's user avatar
2 votes
1 answer
320 views

Constructing a mid using signals from another asset

When delta-neutral market making it is important to construct a mid price. Often the mid price of the asset you are trading is influenced by another (correlated) asset. What methodologies would you ...
mr_mm's user avatar
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Transform non-linear HJB PDE into system of linear ODEs [closed]

I am reading this market making paper, and am trying to understand the transformation presented on page 6. A good resource for background relevant to the transformation is this other market-making ...
V0ltair3's user avatar
1 vote
1 answer
316 views

Dealing with the Inventory Risk (Lehalle, Gueant, Tapia): Delta T parameter and actual order duration

Reference paper: Dealing with the Inventory Risk (Lehalle, Gueant, Tapia) ∆T is the time horizon over which you compute the intensities of aggressive orders (you get the k and A parameters) I have two ...
LaGabriella's user avatar
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1 answer
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Finding the trading intensity - Avellaneda Market Making

Where does the K term come from in Avellaneda's description of finding the probability an order gets filled. Please see the image below
Oscar Morales's user avatar
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What is the difference between Flow Trading and Market Making? [closed]

Are there two definitions to Flow Trading? From reading online, I've gathered two, but I'm not sure if I am mistaken, so a little bit of clarification would be very much appreciated. (1) Flow Trading -...
Murilo Gomes's user avatar
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Clarification on the Quote Rule and the Limit Order Display Rule

I am currently reading Market Liquidity by Foucault, Pagano and Röell. In chapter one they describe the limit order book markets and dealer markets. I am confused about two rules that so called "...
Sinbad The Sailor's user avatar
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1 answer
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What are the parameters’ units in the Avellaneda and Stoikov model?

I'm studying a draft of the paper “Dealing with the Inventory Risk: A solution to the market making problem” by Guéant et al from July 2012. According to the paper, the closed form solution to the ...
JMNQC's user avatar
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Practically, are the prices of 0-strike European calls and stock identical?

By no-arbitrage, the price of a vanilla European call with $K=0$ should be that of the underlying stock (as selling the call is perfectly hedged by buying the stock). However, is this true in practice?...
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Market Making Game Strategy with Information Imbalance

I have a final round with a market making firm coming up and will be asked to play several market making games. I wanted to ask for advice on how to approach these games, especially with an ...
Max's user avatar
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What's the typical markup on quoted exotics, and what drives this premium?

I'm curious about the typical markup on quoted exotic options as well as what drives this premium. You call up an options desk for a quote, and they'll give you a spread that reflects their market on ...
actinidia's user avatar
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1 answer
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Why does a long gamma trader sit on the bid and offer?

I have read in Bennett - Trading Volatility the following quote. As shown above, a long gamma (long volatility) position has to buy shares if they fall, and sell them if they rise. Buying low and ...
SaltyBagel00's user avatar
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1 answer
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How to solve numerically the IDE of GUILBAUD & PHAM model?

By the Guilbaud & Pham model (Optimal high frequency trading with limit and market orders, 2011), the authors said that integro-differential-equation (IDE) can be easily solved by numerical method....
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