Penny-Jump Market Making in Commodity Futures

Summary

The article explains a passive market-making approach that tries to move ahead of a large visible order by placing a limit order one tick better. A trader watches the order book for a sizable participant whose order may act as support or resistance, then seeks to capture a small spread as prices normalize or to exit back into the large order. The discussion frames this as a short-horizon strategy that depends on order-book behavior, inventory, and execution priority, rather than on forecasting broad price trends.

The examples use commodity futures and describe looking for wider gaps between the best bid and offer, especially in less active contracts where multi-tick gaps may appear. The article emphasizes testing with a matching engine that models both price and queue volume, and it outlines position exits and stop-loss behavior. Its evidence is illustrative: it gives order-book scenarios and refers to backtest material, but does not provide enough reported results to establish profitability. The stated test sets fees to zero, and the author says additional forecasting and fee considerations would be needed before judging live viability.

Key ideas

• Penny-jump market making places a limit order one tick ahead of a large visible order to seek a small spread.
• The approach relies on reading order-book size and inferring the intentions of large participants.
• Wider bid-ask gaps in less active contracts may create more opportunities, though they can be infrequent.
• Backtests should model price priority and queue volume to represent passive fills more realistically.
• The illustrated backtest assumes zero fees, so it does not establish real-world profitability.

Tags

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