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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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 ...
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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 .
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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 ...
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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 ...
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Is stochastic control used in market making/algo trading at institutions?
I have recently completed a class that mirrors these lecture notes expect chapter 5: https://www.maths.ed.ac.uk/~dsiska/LecNotesSCDAA.pdf
In chapter 5, they use stochastic control and the Hamiltonian ...
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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 ...
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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, ...
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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 ...
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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 ...
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Exploring order cancellation techniques in high-frequency market making
I'm interested in gaining a better understanding of order cancellation techniques in high-frequency market making. What are the different approaches to order cancellation that are commonly used in HFT ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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
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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 -...
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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 "...
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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 ...
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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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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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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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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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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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