Market Making Strategy

Market makers use a variety of strategies to make money. They may decide to use a symmetrical bid-ask spread, like $1-$3, or they may choose to spread their bets across two or more exchanges. The goal is to maximize profits while minimizing inventory holding time. The risk associated with this strategy is that the market maker may not be able to keep his/her inventory in a positive state for too long.

One strategy involves placing buy and sell orders on both sides of the book. This strategy offers the best prices on the entire exchange. A market maker fills his/her buy and sell orders around the market price. This strategy is called copying the market maker’s strategy, but there are several factors to consider. First, a market maker should have enough liquidity to cover all of his or her buy and sell orders on any given day.

Another strategy is high-frequency market making strategy, which focuses on providing liquidity to the market. Using intra-day tick data, market makers continuously quote the bid and ask sides of a security. This allows them to identify internal and external market states and make simultaneous actions. While the strategy is risky, it can help a trader increase profits by capturing the spread on both bid and ask prices.

The market maker tries to earn a small markup by buying and selling shares as often as possible. He/she has an outright risk when he/she buys a share, but the market maker will attempt to offload this risk to another venue. A simple example of this would be if there were two crypto exchanges, one with low liquidity and one with high liquidity. If the market maker places a market order on one exchange, he/she would immediately send it to the exchange with higher liquidity.