Queue-Aware Market Making with Order-Book Pressure and Trade Impulse
Summary
This tutorial develops a grid market-making example for a large-tick asset, where queue position can strongly affect execution. Its first version estimates fair value from best bid and ask prices weighted by displayed quantity, then shifts a reservation price against inventory. It posts passive buy and sell orders on tick-spaced grids, limits quoting when inventory reaches a cap, and cancels orders that no longer fit the updated grid.
A second version adds a trade impulse based on the latest trade’s direction and size, normalized by recent best-quote depth, to adjust fair value. The document includes backtest setup and output plots, and notes that the example uses a specified maker rebate. It proposes exploring queue-based thresholds and reacting to each incoming feed to reduce adverse selection. However, the text gives no numerical performance conclusion, and results depend on simulated queue behavior, latency, fees, and the chosen market data and settings; the example is educational rather than evidence of live profitability.
Key ideas
- Displayed quantity at the best bid and ask is used to estimate book pressure and fair value.
- The reservation price shifts against current inventory to manage position risk.
- Tick-spaced passive order grids are refreshed while respecting an inventory limit.
- A trade impulse based on the last trade and recent quote depth can modify fair value.
- Queue thresholds and feed-by-feed reactions are proposed for further exploration, with outcomes dependent on backtest assumptions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.