An improved Market Making Strategy

To never quote fixed distance ever again.

The usual first model you use when doing MM is quoting a fixed distance around some sort of fair value.
This could be the midprice of a big exchange like Binance, an adjusted midprice based on some metrics like orderbook imbalance, etc.

Now there are some problems with quoting a fixed distance:

1. It doesn’t account for other orders:

   If you quote 6bps out and there is a huge limit order at 5bps you may not get filled and it may be smarter to quote at 4bps.

2. It doesn’t account for volatility:

   If markets are volatile then you are more likely to get filled further out in the book so why not increase your spread?

3. It doesn’t account for directionality of takers:
   Are takers more likely to buy or sell? This will affect the rate at which we get filled on both sides.

We are gonna build a model that accounts for both of those in this article and then test it live!

For an introduction to Market Making you can check out this article:

If you end up enjoying this article consider getting the paid subscription, that way you can support me and I can write even more articles!
Here is a discount code for those interested: https://www.vertoxquant.com/62375e34

---

Table of Content

1. The Model

2. Building an Orderbook

3. Exchange Connection

4. Testing it Live

5. Final Remarks