Sunday, March 24, 2019

Microstructure effects for a market maker?



When building a market maker that rests limits orders on both sides of the book, what microstructure effects should we be looking at to price those orders? I’m targeting liquid futures markets, and expecting to trade 1-3% of the daily volume.


Current effects that we find useful include the book imbalance (the ratio of volume on the best bid vs the volume on the best offer), and recent trades (someone removing liquidity on the bid is bearish).


What else might impact pricing, and related issues such as portfolio valuation?





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