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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38 views

Avellaneda Stoikov: How to arrive at the formula with infinite horizon?

I am reading a paper High-frequency trading in a limit order book by Avellaneda and Stoikov. I cannot verify the reservation prices given in section [2.3]. Do you know how to arrive? Thanks!
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46 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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126 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 Although weekly COT report is available, it's already outdated by 1 week at the time the report come out ...
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189 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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114 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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111 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 ...
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84 views

What is the point of volatility curve fitting?

What is the point of fitting curves to the implied smile in the market? (Other than pricing exotics where the hedging instruments are vanillas). How does fitting a vol curve help you trade/market make ...
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86 views

Where this HJB equation comes from?

I am reading the paper: "Dealing with the Inventory Risk. A solution to the market making problem", by Olivier Guéant, C.-A. L and Joaquin Fernandez Tapia. On top of page 6, there is a HJB equation I ...
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183 views

Why do options market makers make their spread as wide as the corresponding vega?

I've heard that option market makers make their bid ask spread as wide as the vega of the contract they are quoting. If the quoted spread is narrower than the vega of the option it is said that the ...
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62 views

What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?

What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
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179 views

Arithmetic Brownian Motion in Market Making papers

We often consider high-frequency market maker and suppose that the reference price is the arithmetic Brownian Motion: $dS_{t} = \sigma d W_t$ What is the difference $t_n - t_{n-1}$ in this case? Is ...
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As a market maker, how to prevent short selling on a specific stock with many broker accounts?

Consider a scenario that a market maker placing orders through many brokers. Each broker allows short selling, but the exchange forbids it. How does the market maker ensure that the overall position ...
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76 views

How to weigh computational cost of updating an online predictive model for latency-constrained trading (e.g., market making, HFT)?

Say one has a predictive online model for market making or HFT (or just for anything strictly latency-constrained). In my specific example, I start with a Gaussian distribution over the "true value" ...
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130 views

Market Making independent of outside market price

Is it uncommon to provide liquidity in an asset without consideration of an outside market price? In other words, a market maker would set their bid ask quotes as a function of only their own ...
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180 views

How to calculate average entry price for perpetual swap contracts?

I'm trying to calculate the average entry price for perpetual swap contracts for use in back-testing a trading strategy, as per Bitmex's documentation: A Perpetual Contract is a derivative product ...
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320 views

Options Market Making Used Implied Volatility Surface

Suppose you are a market maker with a model that is producing an implied volatility surface for you. Suppose you quote bid/ask prices (vols) around the prices given by your implied vol surface. In ...
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170 views

Should a high-frequency market-making fair value be a point or bid/offer pair?

A single micro-price (e.g., volume weighted mid adjusted for recent trades) is simpler and can be used for pricing both our bid and our offer. But a bid fair and an offer fair have the desirable ...
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134 views

How to simulate market data and test strategies?

I am trying to implement my own exchange with simulated data and test some strategies on such data. What would be the best way to go about modelling the data that supports live interaction ( limit/...
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198 views

ETF Market Making

I understand market makers of ETFs earn a bid-ask spread (buying low from investors and selling high in the market). But how exactly do they determine when's the right time to buy, and at what price? ...
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154 views

Market maker's Operating Model

I got a question about the liquidity provider's operating model. Really hope if someone can take a look and share some thoughts! Scenario: Say an ETF investor wants to offload a million ETF shares; ...
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175 views

Is there any funds that do market making?

In spite of banks, market making firms, brokers is there any funds that specially do market making?
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257 views

High Frequency Trading in LoB - Sasha Stoikov and Marco Avellaneda

I am reading the paper High Frequecy Trading in a Limit Order Book by Sasha Stoikov and Marco Avellaneda. There is a point that I am having trouble understanding. The authors give a definition of ...
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168 views

How do market makers manage to sell a large number of shares at the end of a trading day without a significant reduction in their price?

The trading day of May 9, 2019 was remarkable in this respect. I have attached the Microsoft screenshot as an example, but I observed the same in many other securities.
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114 views

Achieving an even distribution of orders in the queue

Baron Law, Frederi Viens: Market Making under a Weakly Consistent Limit Order Book Model contains the following paragraph "The market maker may achieve her target execution profile by ...
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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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426 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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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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165 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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1k 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 ...
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143 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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322 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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295 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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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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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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439 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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613 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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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 ...
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256 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 ...
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172 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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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 ...
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362 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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114 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 ...
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255 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 ...
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1k 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 ...
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126 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 ...
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336 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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326 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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458 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'...