Multi-Level Market Making and Queue Priority
Summary
The document considers how a market maker can use multiple limit orders at different prices on the same side of an order book. Its central point is that these orders cannot be analyzed independently: if a farther order executes, nearer orders must have been depleted first. Queue position and the sequence of executions therefore shape the effective behavior of a multi-level quote.
Multiple orders can help a trader become next in line after liquidity at a price is consumed and can offer finer control over execution probability, quantity, and price than a single order. The cited discussion also highlights adverse selection: an execution may occur precisely when the market is moving against the resting order. For evaluating fills, it recommends comparing against an estimate of the eventual or fundamental price rather than assuming the contemporaneous midpoint is a fair benchmark. The document is conceptual and points to related research on liquidity-based tactics; it provides no formal multi-level optimization model, empirical results, or implementation details.
Key ideas
- Orders at different prices on the same side are linked by the order book's execution sequence.
- A farther quote cannot execute before nearer liquidity is depleted.
- Multiple quotes can refine control over execution probability, quantity, and price.
- Queue position matters when estimating the chance and timing of a fill.
- Fills may be adversely selected, so the midpoint can be a misleading benchmark.
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# Optimal Multi-Level Quoting for Market Making # Optimal Multi-Level Quoting for Market Making I have been studying limit order books with focus on the optimal quoting problem for market makers. I have read the Avellaneda-Stoikov model and the subsequent developments. However I am unable to find any papers that quote on multiple levels. It would be very helpful if someone could point me towards such papers. Thanks!!!! ## Answer by lehalle (score 1) https://quant.stackexchange.com/a/79436 I do not think they are such paper, but it is not very different; just pay attention that if you own two orders on the same side of the book, if the further away (from the mid) is executed, then the closest will be executed before. You will probably first need to study in detail the influence of the order of your orders in the queue. That for, I advice to have a look at L, Othmane Mounjid, and Mathieu Rosenbaum. "Optimal liquidity-based trading tactics." Stochastic Systems 11, no. 4 (2021): 368-390. It is good to understand this mechanism because maintaining two orders on the same side of the book will essentially allow you to - get a way to be next in the row once a limit will have been fully depleted - maintain a probability of execution that is finer that what only one order can provide you. You will get more control on the expected executed quantity and the price at which it will be executed. An important take away of this paper is that conditionally to the fact that you obtain an execution, you may have been adversely selected, hence your benchmark price to compare your trade with should not be the mid-price but your best guess for "the price at infinity".
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.