making market

[2rosy]

Quote from jb514:

It seems like you would be extremely exposed to adverse selection. For example if you start the day with no positions, and post bids and offers, the most likely outcome is your portfolio getting very long or short.

really, you think markets just go in one direction all day? also, you dont have to treat each instrument seperately; you can make markets on several securities and lean when you need to. but the idea is volume

 

[bone]

Quote from jb514:

It seems like you would be extremely exposed to adverse selection. For example if you start the day with no positions, and post bids and offers, the most likely outcome is your portfolio getting very long or short.

This is quite true. The liquidity takers will almost always make the net change for the day adverse to the liquidity maker's average price for the day. You will also likely have a net position for the day unless you choose to liquidate it before the close for a loss.

The price distribution for liquidity takers versus liquidity makers will almost certainly not be risk neutral - and that is the dilemma.

 

[jb514]

I suspect its possible to turn some good volume and profit while doing so but it sounds like a major part of the strategy is holding through drawdown/adverse selection.


For instance if your portfolio is 65% long 35% short, you can make two choices.
A) offer aggressively on your longs, closing them for a loss
B) hang more offers hoping to create more short positions

I think statistically, there is no difference between the two choices besides the fact that choice B risks more capital.

 

[WinstonTJ]

Look at all open orders as the portfolio vs. all open positions.

When you make markets across multiple securities you can also assign risk based on sectors (homebuilders vs. consumer goods vs. tech) which helps with hedging - but open orders are the key.