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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1answer
101 views

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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121 views

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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56 views

Equities Market Making Hedging, and Hedging Against the Effects of Hedging?

I was hoping someone could enlighten me as to how equity option market makers hedge in general, and whether they account for the effects of their purchases on the underlying share price when hedging ...
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132 views

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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4answers
472 views

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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120 views

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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55 views

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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1answer
126 views

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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Why are prediction markets based on logarithms when a linear solution can suffice?

For example, take a binary outcome; A coin toss, heads or tails. If heads, then those that picked heads receive \$1 and tails receive \$0. To quote the prices for each bet Hanson's LMSR uses ...
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93 views

queue position value in all limits in the book

How would you evaluate the value of an order in a given limit at a given queue position in the order book ? For example let's say I am a market maker in BTC-USD and I would like to play some HFT games ...
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209 views

Why a probability distribution can be viewed as a price?

in this paper : at page 111, left part, we pass from the distribution p to price p. But I don't see why it's the case. I've searched, and it seems like we can see the LMSR as a n Arrow-Debreu ...
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Can LMSR be used in a decentralised way

I'm working on the link between Hanson's LMSR (Logarithmic Market Scoring Rule),[ref1][ref2], and I would like to know if it's possible to apply in some decentralised way. All whitepapers on AMMs (...
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How is the following realized-price related quantity called?

Let's say we're given a stock $S$, and let's denote by $S_t$ the market price (the last price at which the stock was traded, generally not equal to the midprice) of stock $S$ at time $t$. Is there a ...
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123 views

Who influences Forex prices and by how much?

May question is probably stupid, however I cannot find some reasonable explanation who (and to what extent) is influencing the prices at the Forex market. Most of the stuff I found on the Internet ...
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Why do some market makers have many Market Participant Identifiers (MPIDs)?

I noticed that some (most?) US market making firms have many Market Participant Identifiers (MPIDs). For example, from the list of NASDAQ market participants1: "Jane Street Capital, LLC" ...
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355 views

Post Trade Analysis for Option MMs

What are the kind of post trade analysis (EOD analysis) that an options market making desk does? First few things that comes to my mind are slippages and breaking the pnl into various greeks. Any ...
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1answer
167 views

Calibrate Stochastic Volatility Model

For stochastic volatility models, and any vol model I know, it seems the standard approach is to calibrate the model from option prices. As other user said, this seems a chicken egg problem - how do I ...
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105 views

ETF Arbitrage and Tracking: Impacts of a debt crisis

I am interested in the impacts of a debt crisis on the tracking ability of an ETF. In particular I have read that the market makers for ETFs often take on large short-term loans in order to create or ...
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1answer
105 views

What would be the point of Roll (1984) on measuring the effective bid-ask spread?

If you look at the original paper of Roll (1984), he explains that part of the transaction costs borne out by investors would be the bid-ask spread and that it was "fraught with measurement ...
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Equilibrium in the Kyle (1985) model

In his 1985 paper, Kyle presents 3 versions of the same model: a single period model, a multiple period model and the continuous time limit of the multiple period model. When he formalizes the ...
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1answer
93 views

Market Maker option's pricing with reference spot

When a option's market maker receives a quote from a broker, usually the underlying spot prices is locked with a reference. Let's suppose the following example: Broker: "Buy 10k call 2800 of ABC ...
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59 views

How to estimate traded volume at each tick, given the quotes and the volume at the bid and ask?

I have some data which contains Bid and Ask prices as well as the number of units at the Bid and Ask. Since I'm just messing around and I don't have price of a trade, I will use mid price. But what's ...
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163 views

Estimating the spread of a market maker

If we have an order book and we assume that we know there is only one market maker, how can we determine exactly the spread of the market maker? What if there are more than one market makers?
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186 views

Market Making Formulation

I'm developing a deep reinforcement learning based approach to market-making. In order to implement this, I need to define the appropriate actions and define environmental steps. While doing some ...
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28 views

Why are extended-hours Level-2 stock quotes odd?

What factors contribute to the odd quotes shown for stocks during extended market hours? (I'm guessing that at least some of them are the product of requirements of market makers, but I wonder if ...
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104 views

Market making future and underlying spot

I am learning about market making and have been reading papers by Avellaneda-Stoikov, Bayraktar-Ludvkosli and L-Guéant-Fernandez. All of them attempt to maximize utility function but are based on a ...
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369 views

Recommendations for a text on game theory in the context of market making?

I am looking for a textbook that can give me an introduction to game theory, and also practice problems that can help me build skills to tackle game theory questions. I'm asking this in the context ...
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46 views

Can a pay-for-order-flow wholesaler front-run orders it sees?

An argument I often hear (which was repeated here) against sending orders through "pay-for-flow" wholesalers is that those wholesalers can potentially determine if you are an "informed" trader (as ...
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1answer
372 views

How to identify market makers in an orderbook?

I am trying to identify markets makers within an (options-)orderbook. Of course, this is far stretched, but I was wondering what kind of characteristics / patterns I should look at. I got the ...
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663 views

What does it mean to “calibrate vols”

As a beginner, it can sometimes be hard to discern what different terms and phrases mean in QF. I've heard multiple people such as academics and market-makers say things like "calibrate vols" or "...
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1answer
97 views

Do Institutions (large trading firms) use market orders?

It is well known that Institutional traders (Large trading firms, market makers) most of the time use LIMIT orders or Hidden limit orders. My question is, do they ever use market orders in their ...
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1answer
320 views

How to propertly change time horizon in Avellaneda-Stoikov model?

I'm working in the Avellaneda-Stoikov implementation using Python. My implementation reproduces the authors' results, but I don't know how to properly adapt the algorithm in order to consider a larger ...
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1answer
240 views

How to manage theta, gamma, vega, and delta risk in options market making simulation

I'm just starting to learn how to trade options and as part of an algorithmic options market making simulation I have risk limits for the greeks (gamma, vega, delta, and theta). There are 9 strikes ...
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1answer
106 views

How am I buying at the bid?

I've done some active trading in my personal account at Fidelity. With surprising frequency when I enter market orders I am filled at the bid for buys and at the ask for sells! How and why does this ...
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2answers
76 views

Option Prices Affecting Underlying value Through market makers max pain

In function of the quarantine I started to dig a little deeper into the "Max Pain" principle and how market makers who write the options have to hedge the risk. What I understood so far: Options are ...
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205 views

Market Making constant volatility assumption

I have read a few papers on market making and all(nearly) assume that the stock follows a brownian motion with no drift and constant volatility.These assumptions seems un-intuitive to me because of ...
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61 views

How does modeling provide an edge to banks in the derivatives space?

I was thinking about the actual need for creating quantitative financial models, especially for derivative products. Consider simple calls and puts for different strikes and expiries on stocks and ...
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3answers
220 views

Is it possible to make profit by reversing client trades for a market maker?

If a market maker is making profit in a considerably enough period, then does it mean that the clients that bought/sold from/to the market maker lost money? If so, is it possible that market makers ...
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1answer
131 views

Futures vs. spot forecasting

If i have the belief that the futures lead the spot for price discovery, and I am able to forecast the future prices, given this forecast, what would be the best way to back out this number such that ...
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1answer
217 views

Market makers order execution on the order book

If a market maker is required to always have at least one order on a certain side of the order book (buy or sell), if there's no one else in the market and just market makers left on the book, will ...
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1answer
263 views

How do market makers make money

I was looking into market making and the common idea is market makers make money by capturing the spread. I am a little confused about how this works, since on an exchange if the stock is listed that ...
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What variables are used for the Institutional Activity Index (IAI)?

I've been looking for various ways to get more information about institutional trade action. Although weekly COT report is available, it's already outdated by 1 week at the time the report come out ...
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2answers
1k views

What are Market Makers hedging?

I know that the target of the market makers is to provide liquidity to the markets. Right now I'm working as a developer in a quite large project of F.I. I know that they are providing liquidity for ...
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495 views

How do market makers chose the size that they quote?

A typical quote in the derivatives market may be 2.00 bid at 2.50 ask with a size of say 100x100. How do practitioners go about choosing the size of the market (how many contracts) to quote? It seems ...
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144 views

Why it's related to stock price

I am reading a paper High-frequency trading in a limit order book by Avellaneda and Stoikov. I verified the formula (6) should be correct. However it doesn't make sense to me when I use it for ...
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Optimal control for pairs trading?

My trading scenario is essentially pairs trading 'identical' futures pairs from different exchanges, similar to arbitrage but for futures. One side is entered with limit orders and the opposite side ...