Strategy #0000000026 · Market microstructure and execution
Market making and bid-ask quoting
Change spread, fill probability, adverse selection, fees and inventory haircut to inspect assumed net edge.
Market making and bid-ask quoting converts defined inputs into a rule or allocation. Its scenario illustrates the arithmetic, not validated excess returns.
Spread capture must absorb adverse selection, fees and inventory risk; fills are assumed.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
Market making and bid-ask quoting
A market maker posts bids and asks around a midpoint, hoping to buy lower and sell higher. Rose warns Jack that a fill does not always capture the full spread: after a bid fill, price may keep falling because faster informed traders selected that quote.
As inventory builds, directional exposure grows and the maker may skew quotes or reduce size. Fees, rebates, cancellation latency, queue priority and asymmetric fills all affect outcomes.
The teaching simulation separates two-sided fills, adverse selection, fees and inventory haircut. It does not represent a live order book, actual fill rates or profitability.
- Quoted spreadQuoted spread: assumed scenario 10; no historical observation is implied.
- Expected captured spreadExpected captured spread: assumed scenario 3.6; no historical observation is implied.
- Net after assumed risks/costsNet after assumed risks/costs: assumed scenario 0.7; no historical observation is implied.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
Change spread, fill probability, adverse selection, fees and inventory haircut to inspect assumed net edge.
b and a are bid and ask, with full spread s=a−b; p_b and p_a are fill probabilities; A is adverse-selection cost, F fees and I an inventory-risk haircut. The simplified expression omits fill sequencing and quote updates.
Greeks: the directional intuition
- Input quality
- Measures sensitivity to implied volatility.
- Constraints
- Measures sensitivity to implied volatility.
- Execution
- Measures sensitivity to implied volatility.
- Validation
- Measures sensitivity to implied volatility.
Change spread, fill probability, adverse selection, fees and inventory haircut to inspect assumed net edge.
Practical context · published observations
Market making and bid-ask quoting: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
工具是簡化的單一報價週期算術，不模擬真實限價簿、成交先後、排隊、撤單延遲、價格跳動或庫存動態。雙側成交機率以獨立假設相乘，真實成交通常並不獨立。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Model settings and execution rules change the result.
These methods share a broad idea, but their estimates and trading assumptions are not interchangeable.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Two-sided continuous quotes | Basic spread capture | Posts bid and ask quotes around a reference price. | Inventory and informed flow can overwhelm spread income. |
| Inventory-skewed quotes | Position-aware pricing | Shifts quotes as inventory departs from target. | A poor fair-value estimate can worsen directional exposure. |
| Avellaneda–Stoikov | Reservation price and quote width | Balances inventory risk with fill intensity. | Model assumptions about arrivals and volatility may fail. |
| Queue-aware market making | Order-book position | Models displayed depth and priority at a price level. | Queue estimates and cancellations make fills uncertain. |
This is simplified one-cycle arithmetic, not a limit-order-book simulation. It omits fill sequencing, queue position, cancellation latency, price jumps and inventory dynamics; multiplying side probabilities assumes independence, which real fills need not satisfy.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.