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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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36 views

Achieving an even distribution of orders in the queue

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 ...
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0answers
28 views

Gueant-Lehalle-Tapia, reproducing figure 4

I'm having some trouble reproducing figure 4 from Gueant-Lehalle-Tapia Using the asymptotic quotes given by Left: sigma=0.4, A=0.9, k=0.3, gamma=0.01 Right: sigma=1, A=0.2, k=0.3, gamma=0.01 In both ...
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1answer
77 views

Avellaneda-Stoikov empirical estimation verification

The solution of the model contains constant: $k = \alpha K$, it relates to: (i) probability of getting a fill ($\alpha$) and (ii) market impact ($K$). Estimating (i). The author proposes that the ...
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0answers
36 views

Optimal stochastic control for geometric brownian motion with numerical solution?

Does anyone know of a Avellaneda and Stoikov alike model for geometric brownian motion which also has easy to read numerical solutions for the bid/ask prices?
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78 views

Market making in one tick markets?

I've searched, but found no literature on market making in single tick markets. I'd appreciate any references. Given that most literature on MM assumes micro-structure is mean-reverting due to the ...
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1answer
179 views

Market Making Algorithm/ Strategies

I have been taking a "Trading Strategies" course, but the experience is awful as the instructor barely provides any learning resources. I have an upcoming evaluation on market making algorithm using ...
2
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1answer
74 views

What is the reasoning behind 'terminal time' in market making literature?

Market making literature and models often include a factor for 'terminal time' (1), (2) within which the market maker's inventory is liquidated. What is the reasoning behind this idea? Is it simply ...
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0answers
151 views

Bid-Ask spread in Roll's model: Negative autocovariance of returns and informational content

Currently studying on techniques to estimate the bid-ask spread. Perhaps the most widely known model is the Roll model (1984). Let $P_t$ indicate log prices $\begin{cases} Bid_t=P_t-c, \\ ...
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2answers
142 views

Predicting microstructure momentum in market making

If I have a market maker which is compelled to provide quotes on both sides of the market, I am exposed to risk of quadratic losses (vs my linear gains during normal operations) during times when the ...
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0answers
53 views

How did this after hours massive NFLX short/long strategy make a profit? [closed]

I’ve seen thus market action 2 times now in the past few months. The first was before ADBE earnings release, and most recently was NFLX release. The setup: Earnings release pending after hours ...
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0answers
72 views

Trade sizing with market making and the volume of uninformed trades

I have a trend following market maker in a highly volatile market (XBTUSD) which makes its money from uninformed trades over a short time horizon. Sizing my bids/asks has always caused me to question ...
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4answers
315 views

Modelling HFT data

In the context of Market making, how important is recent trades? In general, would i be able to get away with just modelling the Limit Order Book (LOB) and the evolution of the LOB in order to ...
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5answers
549 views

What actually drives a stock price up ou down?

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say ...
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1answer
106 views

Insoluble Enigma [closed]

I used many statistical tools, i.e. t-SNE, SVM, Neural Network, UMAP, PCA, with the reformatted full market depth data with timestamp each second. UMAP gave me the best data representation, but ...
1
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1answer
194 views

Market making: Predicting when to submit a bid at the ask

The exchange I'm trading on lacks a workable stop limit order type (and just deprecated OTO orders), so in order to be first at the old ask with my bid on an up tick, I have to predict the time when ...
3
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1answer
143 views

To what extent are Lévy processes used in financial engineering?

I know that (time changed) Lévy processes are actively researched in the academic world, including tools such as minimal entropy martingale pricing measures and fast Fourier transforms. To what extent ...
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2answers
464 views

Market impact, why square root?

The standard method of market impact is the square-root formula \begin{equation} \Delta P = c \cdot\sigma \cdot \sqrt{\frac{n}{\nu}} \end{equation} where $\Delta P$ is the price change from executing ...
5
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1answer
193 views

Infinite horizon agent in Avellaneda-Stoikov model

I am trying to understand the Avellaneda-Stoikov model for high frequency trading, in particular the optimizing agent with infinite horizon. The reservation ask/bid prices for such an agent are ...
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0answers
56 views

Certifications or training for a market maker

Are there any schools or certifications that will teach you a "market maker 101" type of course? I was thinking of using some of the FINRA study materials as if I was going to take the Series 57 but ...
4
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1answer
173 views

Finding parameters of a function for optimal market making with real data

I am reading this paper and trying to apply it with real data to do some simulations. I will use realtime order book & market order data that I will receive from the exchange. This is a sample ...
4
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1answer
826 views

Market Making Strategy to Interact with IB API

I was thinking to connect a market making software to the Interactive Brokers API (see IB API), but it seems it is not the best solution as per the information provided by this question: Is the ...
2
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0answers
80 views

Has work been done on PID controllers for optimal trading?

Commonly, stochastic control is the basis for optimal trading (either in execution or market making). Has any research been done (or why not, if none) as to proportional-integral-derivative ...
2
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1answer
237 views

Limit and Market Order for training a ML model

Goal : Using deep learning to build a ML model which would predict the right places where a stock price will increase, decrease or stay stable. For the current question, assume the labels are well ...
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0answers
283 views

Market Maker portfolio management

I am interested in articles/strategies related to portfolio and inventory management for market makers and to management of order cancellation, updates of order, etc. Most of the strategies from ...
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1answer
284 views

What's the rationale behind having several orders on each each side for market makers

I've been browsing market making codebases and I've noticed most of them tend to create multiple orders on each side. Originally I thought having orders on each side is an advanced approach but here'...
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0answers
140 views

Implementing Hanson`s LMSR with Limit Orderbooks

I am trying to integrate Hanson's LMSR (see (see logarithmic market scoring rule)into an order-book with traditional bid/ask-limit orders (in KDB+/Q). The following functions define the basic LMSR ...
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0answers
40 views

Predicting midprice of FX pair increases in exchange Y if it increases in exchange X

I want to make a predictive model to see if the mid-price of P (FX Pair) increases in Exchange X that P will increase in Exchange Y within n seconds with a certain statistical confidence. Exchange X ...
10
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1answer
478 views

Market Making Strategies Found by Hamilton-Jacobi-Bellman Equation

Im working my way through the book "Algorithmic and High-Frequency Trading" (AHFT) by Cartea, Jaimungal and Penalva and i'm curious to see how the market making model with an exponential utility ...
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1answer
219 views

Papers and books related to “Forex” market microstructure

There are lots of papers and books on this topics but haven't seen much specific to forex markets nowadays. Any recommendation on recent papers or books?
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1answer
514 views

Market Making Strategy

In the article A High Frequency Trade Execution Model for Supervised Learning, Matthew Dixon refers to two Market Making Strategies MM1 and MM2 without specifying their true natures. Definition 4....
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4answers
288 views

How frequently do market makers cancel orders?

It is modeled that a market maker will post a limit order for a period of time and will maintain that order until the set period of time expires, or the order is filled, and then he will provide a new ...
6
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2answers
813 views

Backtesting Market Making Strategy or Microstructure Strategy

How does one backtest either a market making strategy or microstructure-based strategy? I'd imagine that one way would be to record order book states over time and then insert the orders, but it seems ...
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0answers
317 views

Approximating Market Making PnL with a Trend Following Strategy

In an interview about the setting up AHL Michael Adams made the following quote (the quote relates to their pre AHL days when they acted as consultants): I think because we we re doing work for ...
3
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2answers
491 views

Literature on FX market-maker hedging strategies

Specifically, FX market making. I am not exactly looking for market-making strategies, but rather when once a market-maker has assumed a net position in a currency spot trading market, what are some ...
6
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1answer
564 views

Finding parameters of an utility function in a market making strategy to apply it in practice

I am reading this paper below about optimal bid-ask spread in a market making strategy. It finds an approximation for optimal solution, but I cannot understand how it's practice to set the parameters ...
2
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1answer
269 views

Understanding how market making helps investors

I'm reading about high frequency trading and market making. I'm trying to understand the following example from my book: Here is an example of how market making helps investors. Suppose that the best ...
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0answers
302 views

What is the proportion of aggressive orders vs passive orders executed by different types of traders?

It's clear that each aggressive order (or market order or limit crossing BBO) is matched against the same volume of resting limit order(s). I'm interested in statistics per different types of ...
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2answers
1k views

How do firms make money from “flow trading”?

Apologies if this is a very simple question, but how exactly do firms make money from "flow trading"? Is it simply profiting from "selling" direct market access?
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1answer
2k views

Avellaneda -Stoikov market making model

I am reading paper High-frequency trading in a limit order book by Marco Avellaneda and Sasha Stoikov. At the end of the paper they obtain a closed-form solution to the optimal market-maker quotes ...
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0answers
327 views

How do you actually solve a stochastic HJB equation in practice?

I've read a number of recent papers on market making. Nearly all of the more recent papers focus on defining the problem in terms of a state and action space, deriving the relevant HJB equations and ...
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2answers
1k views

Theoretical models for options bid-ask spread?

I'm a programmer and recent trading enthusiast. To learn more about options I'm building a market maker trading bot. So far it gets market prices and volatility and calculates the Black&Scholes. I ...
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2answers
226 views

Option Market Making: Hedging large volumes

In the book McMillian on Options the author states that in some cases an option market maker hedges himself by purchasing longer dated options. Unfortunately, the author does not go into detail why ...
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1answer
170 views

Rationale behind trading exchange-traded vs OTC products?

Let's say I am running a fund and I want to place some bets on the market (i.e. speculate) or hedge my current positions. Starting from this, what would be my incentives to go for exchange-traded ...
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4answers
501 views

Market making with resting orders?

I'm still confused on how to provide liquidity on the forex market using passive or resting orders and get the spread from that (selling at ask and buying from bid) And what's the dynamics on the LOB ...
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0answers
69 views

Evaluating passive fills

Assume we look at all passive fills going through a security. How do we benchmark how good each passive fill is (relative to each other)? We expect the edge to be (assuming midprice is our ...
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1answer
67 views

Fees from market order routing in different fee-strucuted exchanges

Let's have two exchanges A and B. Exchange A has maker-taker fee structure, while exchange B has taker-maker fee structure. What happens when a broker routes market order to an exchange B at the time ...
2
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1answer
160 views

What happens when someone makes absurdly high or low bid or ask on a stock?

I was thinking, what would happen if I wrote a script constantly spamming small quantity 1 dollar or maybe 0.1 dollar bids on less liquid stocks (not penny stocks) just hoping to see a situation where ...
0
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1answer
132 views

Pegged orders vs Cancel/Replace

Anyone with real experience between these two types? Trying to use Pegged orders for an hft strategy (on forex) and wanted to know if someone could tell me advantages / disadvantages to use them ...
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1answer
486 views

HFT market-making in dark pools?

Is it now common practice for HFT market-making algorithms to post liquidity in dark pools and exchanges at the same time? I ask because I have been reading some documentation (https://squeezemetrics....
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1answer
219 views

Why doesn't the overnight profit on a delta-hedged porfolio include interest on the initial selling/buying of the option?

I am self-studying and encountered the following passage from my textbook on the market maker's overnight profit on a delta-hedged portfolio: I don't understand why their isn't a factor of $(e^{r/365}...