Author Topic: Market making 101  (Read 552 times)

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Offline monsterer

I'd like some advice from more well informed market makers (MM from now on) on some basic theory. Here are my assumptions

A MM has a limited inventory on each side of the market with which to place limit orders
When a MM's buy order is filled, this means his buy price was too high
When a MM's sell order is filled, this means his sell price was too low

Given that the MM always expects to be wrong, and must re-adjust his prices on a filled order, how does he calculate how much to move them? It seems logical to move them in proportion to the size of the order relative to his inventory, but is the actual amount based on a heuristic, or is there a more precise reasoning?
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