Market Making Approaches: Arbitrage, Rebates, Gamma, and Options
Summary
The document surveys several forms of liquidity provision. It describes cross-market arbitrage, where a trader posts a limit order in one venue and hedges a fill by taking liquidity elsewhere, and rebate trading, which seeks exchange payments for passive fills. It also outlines gamma scalping: holding options with gamma and managing delta through quotes in the market.
Other approaches include exploiting exchange matching rules, designated market making under venue-specific arrangements, and options market making across strikes and expirations while managing portfolio risk. The answer groups these approaches broadly by speed, from low-latency methods to medium-frequency gamma scalping, but does not provide implementation detail or measured results. It cautions that some matching-rule methods are proprietary and that the examples are only a starting point, not a complete catalog.
Key ideas
- Cross-market liquidity provision can pair passive quotes in one venue with aggressive hedges in another.
- Rebate trading seeks exchange payments for limit orders that rest without crossing the market.
- Gamma scalping combines options exposure with active delta management through market quotes.
- Options market makers quote across strikes and expirations while managing aggregate portfolio risks.
- Exchange matching rules and designated market maker arrangements can shape specialized strategies.
Tags
Full text
# What market making strategies are often used nowadays ？ # What market making strategies are often used nowadays ？ I am doing a survey of market making strategies, what's the popular market making strategies? ## Answer by meh (score 24) https://quant.stackexchange.com/a/19160 There are hundreds of different market making strategies that exist. I'm going to change "market making" into liquidity provision and try to give you some areas to begin your research. - Arbitrage. Basically you are going to be quoting in one market using limit orders so that you when you get filled you can spread it into another market where you will probably have to take liquidity. Low Latency. - Gamma Scalping. A super basic idea would be to buy some options so that you get a ton of gamma. Then you would place your limit orders in the book such that you would maintain a delta neutral position. Medium Frequency. - Rebate Trading. Most equity exchanges offer a rebate when you get filled on a limit order that does not cross the market. Many of these strategies try to get $0.01 per trade or scratch and make a living off the rebates. Low Latency. - There are other market making algorithms that take advantage of the matching algorithm (Pro-Rata, Time/Priorty, etc.) I don't think you will find much, if any, information on these types of strategies because they are closely guarded secrets. Most likely all High Frequency/Low Latency. - Designated Market Makers (DMM's). These guys basically do some form of all of the above but they get some advantages based on exchange rules. You can learn more about DMM's at exchange websites like www.cmegroup.com or www.theice.com. - Options Market Making. This is a whole different ball game but you basically quote in an options market at a ton of different strikes/expiration dates and manage a portfolio of risks. Again I don't know how much information you could find for a specific example. I'm sure I'm missing a few examples but this should get you pointed in the right direction.
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.