Crypto Order Book Market Making: Spread Capture and Inventory Risk
Summary
This article explains a basic crypto market-making strategy that places buy and sell orders on opposite sides of a calculated mid-price. It describes adjusting quote distance as pending orders accumulate, rounding prices to exchange precision, submitting both sides, and monitoring order status. The intended source of return is the bid-ask spread, with orders also adding displayed liquidity to the book.
The article provides illustrative code fragments and contrasts spread capture with a same-price trading approach aimed at exchange incentives. It identifies major limitations: the price adjustment is linear and does not use live depth, volume, or volatility, while one-sided fills can leave the strategy holding unwanted inventory. It proposes adaptive pricing, trend awareness, inventory monitoring, hedging, and multiple quote levels as areas to improve. The implementation is explicitly presented as an unvalidated learning example; it includes no backtest or live performance evidence, and the authors caution that market volatility, capital needs, and order handling create substantial risks.
Key ideas
- The strategy places bids and asks at offsets from a mid-price to seek spread revenue.
- Quote distance is adjusted linearly using the pending order count and a minimum price step.
- Exchange precision, order submission, and order status monitoring are part of the described workflow.
- One-sided fills can create inventory exposure that loses value when prices move against the position.
- The example is unvalidated and would need testing and more adaptive pricing and risk controls.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.