Market Making Strategies

market making strategy

In this article, we want to consider market-making strategies in order to know them better.

The needs of Market Making Strategies

According to a research in Nebraska, Over the past few years, the rapid growth and success of automated techniques for e-commerce have resulted in their wide adoption in various domains beyond traditional B2B and B2C commodity markets.

As the role of the market-makers grows, the need for a better understanding of the impact of the market-makers in the market increases as well.

Finally, the reinforcement learning strategy fulfills its tasks of both controlling the spread and maximizing utility.

History of market-making:

The automation of a market maker’s functions was suggested more than three decades ago. Previously, several theoretical approaches, albeit with certain
simplifying assumptions, have been proposed to understand the effects of market makers on financial markets.

Designing a strategy based on :

  • Traders behavior
  • market-makers behavior

As a result,

the rolls of market makers are :

  1. Sets bid and offer prices within a certain currency pair
  2. Commits to accepting deals at these prices within certain constraints
  3. Takes the resulting exposure on to their own book (at least initially)
  4.  Hosting, deployment, and maintenance
  5.  Integrations with portfolio and execution management systems
  6.  Access to historical order book data
Above all,

this white paper mentioned different strategies about market-making :

  • Basic arbitrage strategies: singe trading pair on two exchanges
  • Multiple exchange strategy: increase the likelihood of identifying arbitrage opportunities by monitoring multiple exchanges (more than two)
  • Multiple trading pair strategies / triangular arbitrage: a common strategy
    in foreign exchange markets, using more than a single trading pair for capturing
    arbitrage. Increased complexity and additional trading pairs increase the likelihood
    of the occurrence of a pricing dislocation.
  • Cross-Exchange Market Making: Cross-exchange market-making combines elements from both arbitrage trading and basic
    market making in order to profit from differences in liquidity between trading pairs from
    two (or more) different exchanges. In cross-exchange market making, a market maker trades on or two different exchanges and uses the best available bid and asks.
  • Rebalancing: When employing a cross-exchange market making strategy, it is increasingly likely with
    the passage of time that an imbalance in the direction of trading flows will accumulate.


This is the first step in performing a comparison of multiple market-maker strategies. In the future, we wish to explore different extensions of this work. First of all, we would like to propose and perform comparisons of other market-maker strategies such as using a minimax regret algorithm for price adjustments by the market-maker. Secondly, we would like to study the performance of the market makers with more complex behavior, such as dynamically switching strategies based on past performance. This way, a better balance of maintaining market
quality and maximizing market-maker utilities may be obtained. And lastly, we would like to add various behavioral attributes to the market-maker model such as different risk attributes and making untruthful price revelations through bluffing for improving profits.