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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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 ...
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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 ...
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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 ...
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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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Liquidity Rebate

I have one question regarding the liquidity rebate that liquidity providers receive. I've read on investopedia that it refers to the traders/investors who place limit orders since they then "...
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How do we relate time-horizon with reducing inventory risk in the Avellaneda-Stoikov model?

On the Avellaneda Stoikov Model we have the following definition of reserve price: This means that when q > 0 and the market maker has a long position, the reservation price decreases. So there is ...
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Avellaneda & Stoikov MM paper

I'm reading Avellaneda & Stoikov (2006) model for market making. On section 3.1, one can read we are able to simplify the problem with the ansatz $u(s,x,q,t)=-\exp(-\gamma x)\exp (-\gamma\theta(...
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How can a top-of-the book market maker protect itself from exploiting?

Let's consider there is an instrument N traded on a single venue (centralized anonymous limit orderbook). Let's say that most taker orders are tiny, therefore the one who stays at the best bid/offer ...
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can Soft Actor-Critic reinforcement learning algorithms be used in real-time trading?

I am scratching my head with an optimization problem for Avellaneda and Stoikov market-making algorithm (optimizing the risk aversion parameter), and I've come across https://github.com/im1235/ISAC ...
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How do market-makers profit & manage inventory when customers sell a lot of deep OTM options?

In a live example: Today is June 14, 1 hour before market close, and \$SPY (S&P 500 ETF) is currently at \$372.28 and the June 15 \$350 strike Put is being quoted for \$0.13 on the bid and \$0.14 ...
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Which Day Count Convention applies in a Cross Currency Swap

What is the rule (assuming there is one) specifying which day count convention should prevail in a cross-currency swap? For example, where EUR follows ACT/360 and GBP follows ACT/365, which of the two ...
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Options market: quote-driven or order-driven?

In my understanding: bonds, currencies, and commodities (cash, not derivatives) are traded in a quote driven market with a market maker who "will either fill your order from its inventory or ...
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How an Option market-makers make money?

This might be a very broad question, but I would like if someone can please explain to me how a market makers make money in Options market ? Thank you
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Kyle model for market-maker price

Now I make research about market making for cryptocurrency. I’m using model like Avellaneda-Stoikov for optimal control inventory, and I can’t understand how to find S(t) price. Of course, taking the ...
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Options Market making, what to do with ITM options

I am a option market maker. Say at some point in the time, I end up having only but ITM options in my portfolio and I want to reduce my risk exposure ( delta, Vega, gamma), what can I do to make ...
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Market impact estimation [duplicate]

Can anyone provide us with an empirical example (in Python) of market impact visualization, methods of its estimation (in the framework of a parametric model for impact functions) ?
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Interview Market Making Strategy

This market-making question comes from a prop trading final round which I failed. I was told to make a market on the number of prime numbers between 1-100. I was confident the number was around 20-30. ...
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A question about the Grossman-Miller Market Making Model

I don't have any solid background in finance, but I have a strong mathematics and physics background. I am reading Algorithmic and high-frequency trading from A.Cartea, S.Jaimungal and J.Penalva, CUP (...
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How do Quant Traders follow the market?

I know a big part of Quant trading is following the market daily and then discussing any changes/risks the next day. Just wondering how a typical quant "follows" the market? i.e what market ...
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Downloaded data is quote-driven or order-driven?

I downloaded data from Refinitiv Datastream (But I think that you get the same data from Bloomberg) to write my thesis. I downloaded prices and volumes. I have a crucial question now: Are the prices ...
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Off exchange market maker

I found this picture on SEC of how brokerages handle orders from its customers. Isn’t market maker on the pic essentially called OTC market maker, or wholesaler, or simply dealer? And aren’t they not ...
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Does payment for order flow happen on non-OTC stock markets?

I thought since brokers on non-OTC market have obligation to get its customers best execution price, it’s meaningless for dealers(market maker) to pay brokers for the order flow for dealers to make “...
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How do brokerage firms provide liquidity?

Do they directly put limit orders on the order book? Or do they automatically fill limit/market orders from customers and have offsetting position with their market maker(LP) to offset their net ...
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Adverse selection and market makers

What are practical examples of adverse selection market makers have to deal with?? I’ve read books but couldn’t really understand the concepts…
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How Market makers work

Is it true that approved market makers are simply taking the other side of the orders from retail or maybe institutions whatever the price is without actually being on the order book, and they also ...
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Privatelink latency impact

I am working with a team on a market making algorithm on Huobi. We are integrating our infrastructure in AWS and when you are a S tier you can get a privatelink which is about 10 to 50 ms faster than ...
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How do market makers calculate bid/ask prices to quote for RFQs, specifically for stocks? [duplicate]

Say a client submits an RFQ to buy/sell 100,000 Apple shares. The market maker will respond with their bid/ask prices. My question is how are these bid/ask prices calculated by the market maker? Is ...
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Orderbook Liquidity Parameter Avellaneda Stoikov

I am trying to implement Avellaneda & Stoikov (2006) model for HF market making on L2 orderbook data. Most parameters are straight forward but I am struggling with the orderbook liquidity ...
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at what frequency do option market makers delta hedge

Could someone with option market making experience tell me usually at what frequency do the major option market makers delta-hedge their positions (say for US single stocks or equity indices)? ...
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Building a simple option market making model

I want to do market making on options. Say I have a portfolio made of options. Denote by $Vega^{\pi}$ the Vega of the portfolio, $Vega_{i}$ the Vega of the $i^{th}$ option and $\tilde{Vega}$ the ...
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Delta of FX Options, Different Currency in Trading Book - Trading Interview Question

Having done stochastic analysis in university, together with tons of other math courses, do never prepare you for an actual interview in trading. Stumbled on what I believe might be an easy question, ...
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Confusion Regarding Dynamically Delta Hedging a Short Option

To my understanding, market makers (mm) in the options market dynamically delta-hedge their portfolios by buying/shorting the underlying, thus eliminating directional risk and profiting from providing ...
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Why the highest transaction price of stock in a time period can be higher than a sell limit order price, but the order is not filled?

Sometimes a sell limit order is not filled in a period even when the highest transaction price is higher than the limit order price. I don't understand why this could occur. The fact that the ...
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In Avellaneda-Stoikov market making, what is the difference between "reservation prices" and "optimal bid ask quotes"?

Question What is the difference between "reservation price" and "optimal bid and ask quotes"? Are they the same thing? (1) Reservaton price In the paper High-frequency trading ...
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Trade anything?

I have a question after reading the post below. https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html Question: I want to bet on a niche topic or asset or anything that ...
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Market making with transaction fee literature

In the past 2 months, I have read number of literature on market making; however, all of it has not considered transaction fee. Therefore, when implemented, those strategies are all loss-making after ...
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Market making algo using bid ask order volume ladder

I am looking for references for market-making strategies using bid-ask order ladder. Algo should suggest entry prices, and do inventory management. I am more interested in practical simple algo used ...
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Market-maker's gain variance

I am reading the book "Trades, Quotes and Prices" by JEAN-PHILIPPE BOUCHAUD and have stuck in the very beginning with understanding the formula of variance of MM's gain per trade (see ...
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Stochastic optimization and mean field games : textbooks

Which textbooks and online courses would you recommend to learn : stochastic optimization mean field games applied to quantitative finance. My goal would be to read research articles like the ones ...
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How to derive the HJB equation under this paper's context?

I'm reading this paper:High frequency trading in a limit order book. IN section 3.1, an HJB equatioin was given without any details. Could anyone show how to arrive this equation step by setp? I have ...
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What is "risk-hit ratio"?

In this article https://www.risk.net/awards/7741391/flow-market-maker-of-the-year-citadel-securities describing Citadel Securities the market maker, it says The firm’s electronically executed US ...
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What does a electronic dealer track in a RFQ market?

If you have mid price for rfq market in fixed income. What is the internal order book tracking at a bank? Customers dont place limit orders or do they? There arent any other market makers on your ...
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What prevents market-makers to do speculative trades with much better conditions than other traders?

Market-makers gain profit from the bid-ask spread. This means that they could place speculative positions without any cost (they pay the spread to themselves = zero cost). I assume there are laws ...
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Is this the PnL you would expect to see for a hedged call option portfolio? [closed]

You are a market maker. Charging no commission, your only aim is to remain market (delta) neutral. Therefore you construct a portfolio of the form: $$\Pi = -C - w_{1} B + w_{2} S$$ where $B = K \cdot ...
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Presuming a Market Maker must delta-hedge, how can it still earn money?

I know that "There are other ways to hedge price risk other than buying the underlying. It's not uncommon but it doesn't "always" happen". "You can buy/sell other options to ...
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How do you detect order execution algorithms?

Most large orders nowadays are done through TWAP or VWAP based order execution. For example, if Alice wants to sell $60 million in EURUSD she will break up her order into 50,000 tiny orders and then ...
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What is a proper way to evaluate a backtested strategy if its trading asset has a strong trend?

I backtested a strategy that trades bitcoin, but I'm not sure if it's worth doing it because of the recent strong trend of bitcoin. The buy-and-hold has a better return, Sharpe ratio of the strategy ...
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ETF Market Making - Locking profits via hedging

I am interested in deeply understanding the way ETF market makers operate to profit. I already know that market makers profit from buying at the bid price and selling at the ask price, and I am also ...
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Fair Value Regression Methods

Recently we had an invited talk at our university (I'm Ph.D. student in ML department, so I'm sorry if my question is stupid, since I do not have quantitative finance background), where one researcher ...

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