Why a Market-Making Model’s Strategy Definitions Are Not Specific
Summary
The document examines definitions of a market-making strategy in a supervised-learning context. The cited definitions describe a strategy as a time-dependent vector of quotes selected using a prediction, and a market-making strategy as paired bid and ask quotes. The question is whether labels for two strategies in the referenced research identify particular market-making approaches.
The accepted response says the definitions alone do not specify a concrete strategy. They describe when quotes are placed and which sides of the market are quoted, but do not determine quote placement, order size, inventory controls, or the prediction’s role in trading decisions. The response names broad HFT categories, including order-flow prediction, execution, liquidity provision, and arbitrage, but gives no detailed design or comparative evidence. Readers should treat the exchange as a clarification of terminology, not as a strategy recipe or empirical assessment of market-making performance.
Key ideas
- The definitions describe time-dependent bid and ask quotes informed by a prediction.
- They do not specify enough details to identify a particular market-making strategy.
- Quote placement, size, and inventory management are among the implementation choices left open.
- The response lists broad HFT strategy categories without evaluating their performance.
Tags
Full text
# Market Making Strategy
# Market Making Strategy
In the article A High Frequency Trade Execution Model for Supervised Learning, Matthew Dixon refers to two Market Making Strategies MM1 and MM2 without specifying their true natures.
> Definition 4.0.1 (Strategy) : A strategy is a $n$-vector function $L: \mathbb{R}^{+} \times \mathbb{Z} \cap (-m, m] \to \mathbb{Z}^{n}$ of the form $L_{t}(\hat{Y}_{t})$, where $t$ denotes the time that the trade is placed. Based on the predicted value of $\hat{Y}_{t}$, the strategy quotes on either the bid and ask at one or more price levels. Definition 4.0.2 (Market Making Strategy) : A market making strategy is the pair $L_{t} = (L^{a}_{t}, L^{b}_{t})$ representing the quoting of a bid and ask at time $t$.
Can you tell me which Market Making Strategy (MMS) he is referring to? Otherwise, what would be a good MMS in relation to the previous definitions? Any article?
## Answer by Vincent C. (score 5, accepted)
https://quant.stackexchange.com/a/39194
Unfortunately, with the info given, he isn't referring to any specific MMS at all. He is actually just defining some basic properties that are pretty straight forward.
In Definition 4.0.1 & 4.0.2 he defines an n-vector in a bounded area and states that a strategy is just "something" execute at some time "t" given some prediction. He follows by including some bid/ask variables to his previous statement, this doesn't tell us much (most of this you already know), hence the reason why he isn't specific about anything.
Here is a list of some well known types of HFT/MMS with lots of online resources:
- Order flow prediction HFT strategies
- Execution HFT Strategies
- Liquidity Provisioning – Market Making strategies
- Automated HFT Arbitrage strategies
For those who are new to HFT, I suggest reading this quick article, it breaks down HFT and how it works without getting too complicated:
https://www.quantinsti.com/blog/automated-market-making-overview/Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.