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 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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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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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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Volatility on Avellaneda Stoikov MM [closed]
I have a problem on defining the parameter for volatility in the Avellaneda Stoikov paper.
It is calculated on log returns, log prices, percentage price, etc?
I need a consistent method for evaluating ...
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Avellaneda & Stoikov MM paper
I'm reading Avellaneda & Stoikov (2006) model for market making. On section 3.1, one can read
we are able to simplify the problem with the ansatz
$u(s,x,q,t)=-\exp(-\gamma x)\exp (-\gamma\theta(...
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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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In Avellaneda-Stoikov market making, what is the difference between "reservation prices" and "optimal bid ask quotes"?
Question
What is the difference between "reservation price" and "optimal bid and ask quotes"?
Are they the same thing?
(1) Reservaton price
In the paper High-frequency trading ...
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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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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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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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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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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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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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Orderbook Liquidity Parameter Avellaneda Stoikov
I am trying to implement Avellaneda & Stoikov (2006) model for HF market making on L2 orderbook data.
Most parameters are straight forward but I am struggling with the orderbook liquidity ...
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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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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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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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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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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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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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Market Making Literature
I am not sure if this is the correct site to ask this, if not I apologize.
I have noticed some markets that lack in liquidity, and wonder why market makers in these markets cannot provide liquidity ...
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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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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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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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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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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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Privatelink latency impact
I am working with a team on a market making algorithm on Huobi. We are integrating our infrastructure in AWS and when you are a S tier you can get a privatelink which is about 10 to 50 ms faster than ...
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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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Confusion Regarding Dynamically Delta Hedging a Short Option
To my understanding, market makers (mm) in the options market dynamically delta-hedge their portfolios by buying/shorting the underlying, thus eliminating directional risk and profiting from providing ...
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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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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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Options market: quote-driven or order-driven?
In my understanding:
bonds, currencies, and commodities (cash, not derivatives) are traded in a quote driven market with a market maker who "will either fill your order from its inventory or ...
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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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academic papers about market making
I am looking for academic articles which model the p&L of market makers. I have read the Ho-Stoll (1984) article. Is there any recent article on this subject?
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Trade anything?
I have a question after reading the post below.
https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html
Question:
I want to bet on a niche topic or asset or anything that ...
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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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Quantitative Math required for Market-making?
I understand there is an awful lot of Quantitative Math required for statistical arbitrage/algorithmic trading. However, would someone "in the know" be able to tell me whether there is less ...
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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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How Market makers work
Is it true that approved market makers are simply taking the other side of the orders from retail or maybe institutions whatever the price is without actually being on the order book, and they also ...
