Market Making Books and Research on Liquidity, Inventory, and Signals

Summary

The document points readers seeking to provide liquidity in less active markets toward established market making literature. It names books covering financial market liquidity, algorithmic and high-frequency trading, and practical market microstructure, then traces a line of research on optimal quoting and inventory risk from an early limit-order-book model to later extensions. These references offer theoretical frameworks for studying how market makers choose quotes while managing the risk of holding inventory.

The document also identifies a limitation in that literature: the cited works do not directly explain the signals or toxicity measures practitioners may use to assess incoming order flow. It suggests a separate paper section as a starting point for that topic. The response is a bibliography rather than a comparison of methods or empirical evidence, and it does not explain how to apply the models to a particular illiquid market or show that a strategy will work there.

Key ideas

• Market making literature spans financial liquidity, algorithmic trading, and market microstructure.
• Optimal quoting models examine how inventory risk affects market making decisions.
• Later work extends an earlier limit-order-book framework for market making.
• The cited literature is described as giving limited direct coverage to practitioner signals and order-flow toxicity measures.
• The recommendations are reading leads, not evidence that a particular approach will succeed in an illiquid market.

Tags

# Market Making Literature


# Market Making Literature












I am not sure if this is the correct site to ask this, if not I apologize.

I have noticed some markets that lack in liquidity, and wonder why market makers in these markets cannot provide liquidity on the same scale as in other markets.

I would appreciate some links to academic literature, general market making books etc...So I can learn ways to provide liquidity to illiquid markets and various general market making techniques.

## Answer by lehalle (score 4)

https://quant.stackexchange.com/a/73694

they are different books for quants addressing market microstructure

- The Financial Mathematics of Market Liquidity 2016, by Guéant

- Algorithmic and High-Frequency Trading 2015, by Cartea, Jaimungal, Penalva

- Market Microstructure in Practice 2nd edition 2018, L and Laruelle

In terms of papers: Dealing with the Inventory Risk. A solution to the market making problem 2012 by Guéant, L and Fernandez-Tapia is the final extension of High-frequency trading in a limit order book 2007 by Avellaneda and Stoikov.

Most of these papers do not directly address the question of signals and toxicity metrics that market makers are using. That for, I recommend Section 4 ("Evidence for the use of signals in trading") of Incorporating Signals into Optimal Trading 2018, by Neuman and L.

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