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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21 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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52 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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105 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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29 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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130 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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393 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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71 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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111 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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103 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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84 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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57 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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137 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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57 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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187 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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94 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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86 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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84 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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189 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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37 views

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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324 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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227 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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123 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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69 views

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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191 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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115 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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273 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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69 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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233 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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66 views

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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92 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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147 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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527 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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1answer
534 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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221 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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147 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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233 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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184 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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198 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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335 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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182 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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131 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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628 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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98 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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193 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
2k 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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160 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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417 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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348 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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105 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 ...