Reconstructing Market Maker PnL from Trades and Prices

Summary

The question proposes estimating aggregate market-maker profit from quoted spreads multiplied by traded quantity in highly liquid options data. The response explains why this spread-based calculation is incomplete: it does not capture losses or gains from holding inventory while prices move. A more informative reconstruction uses the observed trades and prices, while tracking inventory as it changes with trade flow.

This approach concerns aggregate market-maker PnL; calculating PnL for individual market makers requires knowing which participant made each trade. The answer also excludes exchange maker rebates, so the resulting estimate would omit that component. It gives a conceptual accounting direction, not a worked formula or implementation details, and the accuracy depends on having sufficiently complete trade, price, and attribution data.

Key ideas

• Spread capture alone does not measure total market-maker PnL.
• Inventory changes from trades must be tracked to estimate aggregate exposure.
• Price changes against held inventory can offset or exceed spread earnings.
• Individual market-maker PnL requires identifying the maker in each trade.
• The suggested reconstruction omits exchange rebates.

Tags

# Can we track market maker pnl from spreads and executed trades in market


# Can we track market maker pnl from spreads and executed trades in market












Am new to quant world and is trying a naive approach to find at which time the market maker had highest profit trading the entire session to further study orderflow of that time and price . Present approach is to get spread data multiply by traded ltq against the spread , any reasearch methods updating this naive equation would work if someone could answer this (trying this on highly liquid options data tbt)

## Answer by Max Michlits (score 1)

https://quant.stackexchange.com/a/85715

Do you want an aggregated market maker PnL or do you want a PnL per market maker for which you'd need to know who was the maker in each trade which I assume you don't know.

Assuming you want the aggregated market maker PnL: Disregarding Maker Rebates from the exchange, you can reconstruct the market makers PnL using their trades and prices, not spreads alone. If they hold inventory and the price moves against them it will not show up if you just check the spread. You'd need to know the price too which shouldn't be too hard tho. Their inventory you can reconstruct from trades.

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