Why Passive Limit Orders Can Improve the Quote
Summary
The document explains why a best quote may move after a trader changes or withdraws a limit order, without the trader being identified as a non-market maker. The answer attributes this behavior to other passive participants choosing to improve the quote when the displayed order leaves room. It distinguishes that action from taking liquidity by crossing the spread: posting at a new price and executing against an existing quote are different choices, and fees or rebates can affect them.
The evidence is a qualitative explanation of the order-book sequence described in the question. It does not present a quantitative detection method, data analysis, or proof that the observed pattern always has this cause. The broader lesson is that quote changes can reflect other traders’ incentives and available liquidity rather than participant classification. Market structure, fee schedules, and the specific venue may shape the behavior, so the explanation should not be treated as a universal account of every quote movement.
Key ideas
- A quote that improves after an order is moved can result from another passive trader stepping into the available price level.
- Posting a new limit price and executing against an existing quote are distinct trading actions.
- Fees and rebates can influence whether a participant posts passively or takes liquidity.
- The document offers a qualitative explanation, not a method for identifying individual market participants.
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Full text
# Distinguish between market makers and other participants?
# Distinguish between market makers and other participants?
Are there any known quantitative techniques to distinguish between market makers and other participants?
I manually MFT, have no knowledge of these specialties, and may be observing phenomena that really aren't there, but it seems that when I'm working an order between the spread, trying for a better than best offer price, the IV will drift away from its current average against my favor. In fact, if I move my offer away from the opposing best, the best offer immediately moves to my previous offer with no change in underlying price.
As an example, if I'm bidding X, the offer is X+0.01, and the underlying moves from Y to Y-0.01, my order is not hit, but after I move my bid to X-0.01, and the underlying remains at Y-0,01, the ask moves to X. I think I observe the analogue when selling as well.
I'm sure I leave signatures that indicate I am not algorithmically trading that I'm identified as a non-market maker, so is that why I'm perceiving this phenomenon, or is it merely coincidence? If my observations are valid, what techniques are used to identify my orders as non-market making?
## Answer by Louis Marascio (score 1, accepted)
https://quant.stackexchange.com/a/9582
It's got nothing to do with you being identified as a market maker or not. It is simply that the other participants at that time are passive traders. The choice between hitting a bid or lighting a new level with a new offer are distinct and very different (especially, in some markets, in terms of fees paid or rebates received).
So, you're not being identified as a non-market maker, you're simply trading in a market full of other passive limit traders ("market makers" either official or not). When you fade your bid some other participant sees an opportunity to improve the offer and does so.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.