I am doing a survey of market making strategies, what's the popular market making strategies?

  • 2
    $\begingroup$ buy low, sell high $\endgroup$ – bcf Aug 3 '15 at 18:46
  • $\begingroup$ @bcf is there any more sort, systematic version? I need to make a presentation, I want to do a due deligence job, intead of making just a simple word. $\endgroup$ – ZHI Aug 3 '15 at 18:51

There are hundreds of different market making strategies that exist. I'm going to change "market making" into liquidity provision and try to give you some areas to begin your research.

1) Arbitrage. Basically you are going to be quoting in one market using limit orders so that you when you get filled you can spread it into another market where you will probably have to take liquidity. Low Latency.

2)Gamma Scalping. A super basic idea would be to buy some options so that you get a ton of gamma. Then you would place your limit orders in the book such that you would maintain a delta neutral position. Medium Frequency.

3)Rebate Trading. Most equity exchanges offer a rebate when you get filled on a limit order that does not cross the market. Many of these strategies try to get $0.01 per trade or scratch and make a living off the rebates. Low Latency.

4)There are other market making algorithms that take advantage of the matching algorithm (Pro-Rata, Time/Priorty, etc.) I don't think you will find much, if any, information on these types of strategies because they are closely guarded secrets. Most likely all High Frequency/Low Latency.

5)Designated Market Makers (DMM's). These guys basically do some form of all of the above but they get some advantages based on exchange rules. You can learn more about DMM's at exchange websites like www.cmegroup.com or www.theice.com.

6)Options Market Making. This is a whole different ball game but you basically quote in an options market at a ton of different strikes/expiration dates and manage a portfolio of risks. Again I don't know how much information you could find for a specific example.

I'm sure I'm missing a few examples but this should get you pointed in the right direction.


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