High-Frequency Market Making
You met the market maker who earns the spread. Now sit in its seat — set the two prices, manage the inventory, and survive the informed traders and the faster firms trying to pick you off.
Quoting both sides of the book for a living. The market-making P&L (spread capture minus adverse selection minus inventory risk), the Avellaneda–Stoikov optimal-quoting model, the reservation price and inventory skew, the Glosten–Milgrom view of adverse selection, queue position and fill probability, the latency arms race, and maker-taker rebate economics. Live quoting simulators and worked numbers throughout.
Market Microstructure taught you to read the order book; Algorithmic Trading taught you to cross the spread cheaply. This course flips you to the other side of every trade: the market maker who posts the two prices everyone else trades against, and earns the spread for standing there.
It looks like free money — buy at the bid, sell at the ask, pocket the difference, repeat a million times a day. It isn’t. Two forces are constantly trying to bleed the maker dry: inventory risk (every fill leaves you holding a position that can move against you) and adverse selection (the people most eager to trade with you are exactly the ones who know something you don’t). The whole craft is quoting wide enough, and skewing cleverly enough, to earn more spread than those two forces take back — while a pack of faster firms races you for every profitable quote.
You’ll learn, from the inside:
- The market-making P&L — the exact three-way decomposition (spread capture − adverse selection − inventory cost) that says whether a quoting business actually makes money.
- The Avellaneda–Stoikov model — the canonical optimal-quoting framework: the reservation price, the optimal spread, and how risk aversion, volatility, and time-to-close set them.
- Inventory risk & quote skewing — why the maker shades both quotes toward the side that flattens it, turning a wandering position into a mean-reverting one.
- Adverse selection & Glosten–Milgrom — the model where the spread exists purely because some traders are informed, and quotes update with the information their orders reveal.
- Queue position & order-book dynamics — why where you stand in the queue is half the game, and how fill probability and the cancel/replace race actually work.
- Latency & the speed arms race — colocation, microwave towers, sniping, and the billion-dollar question of whether being one microsecond faster is worth it.
- Maker-taker & rebate economics — how exchange fee schedules, rebates, and tiers quietly reshape where and how makers quote.
Finish this and the on-chain version — onchain-arbitrage-and-cross-dex-mev — will read like the same game played on a slower, more transparent, and far stranger venue.
In this topic
- 1 The Market Maker's P&L Earning the spread is not earning a profit. Decompose a market maker's realized P&L into spread capture, adverse selection, inventory cost, and rebates — with markouts and worked numbers. 18 min
- 2 The Avellaneda–Stoikov Model The canonical optimal market-making model: the reservation price, the optimal bid-ask spread, and how risk aversion, volatility and time-to-close set your quotes. 20 min
- 3 Inventory Risk & Quote Skewing Inventory is the maker's core risk. Learn how skewing both quotes by −qγσ²(T−t) steers inventory back to target, plus limits, hedging and the optimal-skew trade-off. 18 min
- 4 Adverse Selection & Glosten–Milgrom Why a spread exists even with zero inventory and zero cost: the Glosten–Milgrom model, Bayesian price discovery, toxicity measures, and maker defenses. 19 min
- 5 Queue Position & Order-Book Dynamics At a one-tick spread you can't undercut, so makers compete on TIME. Master FIFO queue position, fill probability, queue-as-option, imbalance, and tick regimes. 18 min
- 6 Latency & the Speed Arms Race Why a market maker must be fast: stale-quote sniping, Budish–Cramton–Shim, the latency budget, Chicago–NJ microwave, winner-take-all rents, and speed bumps. 17 min
- 7 Maker-Taker & Rebate Economics Exchanges pay makers a rebate and charge takers a fee. Master maker-taker, inverted venues, tiered pricing, PFOF and why rebates quietly reshape behavior. 17 min
- 8 High-Frequency Market Making — Final Exam The graded final exam for High-Frequency Market Making: P&L decomposition, Avellaneda–Stoikov, inventory skewing, adverse selection, queue dynamics, latency, and maker-taker economics. 20 min
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