Market Making Strategies

Market Making Strategies

Market Making

Post prices we are willing to buy and sell out. If vol is high, then we might expect both our bid and asks to be hit, giving us a riskless profit.

Determing Price:

• VWAP
• Mid-Price

Determine Spread

Determine Volume

The risk is that only one side of our prices fit - a trending market.

Momentum

Use the limit order book, or last traded ticks to forecast the direction across some time horizon. The engage in pre-hedging - buy / sell in the forecasted direction, and then close out the trade. This is a question of modelling

Listing Arbitrage / Pairs Trade

For an asset listed on multiple exchanges, if there is a discrepancy between their listed prices - i.e. $best_ask_i < best_bid_j$ for some two exchanges, then given the underlying is the same, an arbitrage exists.

In practice, this would probably require low latency to execute. Additional questions: how to ensure that your order gets filled first (tighten the spread?), and what volume to buy/sell.

This assumes that there is no underlying structural reason behind the discrepancies between exchanges (e.g. liquidity premium vs the exchanges)