Why Manual Futures Market Making Faces Adverse Price Moves
Summary
The document explains a basic manual market-making approach in index futures: quote both bid and ask, attempt to earn the spread, and manage an unbalanced position after one side fills. If a trader sells to a buyer at the ask and the market moves higher before the bid fills, the trader is left short at a worse price. The response emphasizes that this adverse move can occur frequently in markets with substantial algorithmic participation, making hand-scalping difficult.
The discussion is qualitative and offers no performance data, sizing rules, or detailed inventory controls. It distinguishes the simple spread-capture idea from the practical challenge of getting both sides filled without accumulating a losing position. It also points readers toward academic and practitioner work on inventory risk and optimal market making, but does not summarize that material. The central limitation is that a small targeted spread does not make the strategy low risk: adverse selection and price movement between fills can outweigh the expected gain, and the document does not quantify costs or execution conditions.
Key ideas
- A basic market-making approach quotes both sides and seeks to capture the bid-ask spread.
- One-sided fills create inventory exposure until the other side trades or the position is closed.
- A price move after a fill can turn a targeted spread capture into a loss.
- Algorithmic competition makes manual futures scalping difficult, according to the response.
- The document provides no quantitative evidence or detailed risk-management procedure.
Tags
Full text
# Market making in futures # Market making in futures I am learning various strategies to day trade the emini SP500 futures contract (ES) based largely around order flow principles and price action. I have been wanting to learn more about market making styles that can be used on a manual basis rather than automated basis. From what I have read, most market making styles revolve around getting filled on the bid/ask and trying to take one tick and either scratch or take a very small loss if that one tick is not realized. Is this the case? I realize the ES is used for a huge number of reasons from stat-arb to position trades/hedging and virtually everything in between. As a day trader, being risk averse is very important to me and from what I have heard, market making styles tend to be highly risk averse. Any input on being a market maker in these markets is appreciated. I know many prop firms hire traders (click traders, not necessarily HFT traders) to scalp or "make a market" in the index futures. Thanks ## Answer by dm63 (score 4) https://quant.stackexchange.com/a/25230 The idea is to make both sides of the market in some size eg 2000.01-2000.02, 100x100. If you get lifted you continue to work the bid side for some period of time and then if you don't get hit, you give up and lift the offer. As long as you get filled on both sides some of the time, you make a small amount of money. The problem comes when you get lifted and the market becomes 2000.02-2000.03. Then you are short at 2000.02 and are underwater. The fact is, this happens more often than not nowadays, due to the increased participation of algorithms. Hand-scalping is not very easy nowadays. ## Answer by lehalle (score 1) https://quant.stackexchange.com/a/25431 The most generic paper I know about market making is "Dealing with the Inventory Risk. A solution to the market making problem", by Olivier Guéant, C.-A. L and Joaquin Fernandez Tapia. Olivier Guéant just issued a book on this topic: The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making. It recommend it; it is practical and can be used by quants to make markets.
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