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Modeling Spread, Volatility, and Volume for Market-Making

Article arXiv papers · Author: Jack Sarkissian
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Summary

The document describes a model linking bid–ask spreads with volatility, trading volume, time horizon, and measurable market microstructure factors. It frames spreads as the outcome of competing effects from available order liquidity and the price impact of trading. At low volume, adding liquidity can improve price accuracy and narrow the spread; beyond a point, more liquidity may instead worsen prices.

The model connects spread behavior and high–low price bars to those market conditions, then uses the relationships to formulate an operating-spread optimization problem aimed at market-making profit. The text provides a conceptual account of the model and its intended application, but no equations, dataset, empirical results, or specific optimization procedure. Its claims therefore cannot be independently assessed from this description alone.

Key ideas

  • Bid–ask spreads reflect the interaction between order liquidity and trading impact.
  • At low trading volume, additional liquidity may improve price accuracy and reduce spreads.
  • Beyond some point, additional liquidity may worsen price quality.
  • The model relates spreads and high–low bars to volume, volatility, time horizon, and microstructure parameters.
  • Market makers can use the proposed relationships to optimize their operating spread.

Tags

Market makingMarket microstructureVolatilityExecution
Full text
# Spread, volatility, and volume relationship in financial markets and market making profit optimization


# Spread, volatility, and volume relationship in financial markets and market making profit optimization









We study the relationship between price spread, volatility and trading volume. We find that spread forms as a result of interplay between order liquidity and order impact. When trading volume is small adding more liquidity helps improve price accuracy and reduce spread, but after some point additional liquidity begins to deteriorate price. The model allows to connect the bid-ask spread and high-low bars to measurable microstructural parameters and express their dependence on trading volume, volatility and time horizon. Using the established relations, we address the operating spread optimization problem to maximize market-making profit.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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