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Choosing Volatility-Based Quote Widening for Market-Making Orders

Article Quant Q&A · Author: SpaceMonkey
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Summary

The document raises a market-making design question about how to widen a ladder of orders when volatility changes. It contrasts adding a fixed number of basis points to every order with multiplying each order’s existing spread by a factor. Because the ladder ranges from tight quotes near the top of the book to wider quotes farther away, the author is concerned that a uniform addition may have uneven effects: it could dominate the tight quotes while barely changing the wider ones.

No answer, tested method, or performance evidence is included; the text asks readers for their experience. It therefore identifies a practical trade-off rather than establishing which rule is preferable. The appropriate choice would depend on the quote ladder, the volatility measure, and the desired behavior of spreads across levels, none of which are specified. Readers should treat it as an open implementation question, not a validated strategy.

Key ideas

  • A market maker may widen a multi-level order ladder as volatility rises.
  • A fixed basis-point addition changes tight and wide quotes by different proportions.
  • Multiplying existing spreads preserves their relative spacing more directly.
  • The document poses the choice but provides no recommendation or empirical comparison.

Tags

Market makingVolatilityExecution
Full text
# Market making - widening orders based on volatility, constant bps or multiply spread by factor?


# Market making - widening orders based on volatility, constant bps or multiply spread by factor?












let's say we are placing 5 orders on the book, top is tight, bottom is wide.

When widening based on vol, do I add the same N bps to all orders or multiply the spread by X factor instead?

Adding N bps won't matter for wide orders and might add too much to smaller orders.

What is your experience?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.