Researcher course in high-frequency trading
Market Making
How a market making strategy earns the spread and survives: quoting both sides of the book, managing inventory, spotting informed flow, the optimal quoting models of Avellaneda, Stoikov and their successors, and testing a market maker on order book data.
A market making strategy quotes a price to buy and a price to sell at the same time, and earns the gap between them. It sounds simple, and it is one of the most competitive activities in markets. This course teaches the economics, the mathematics of optimal quoting, and the simulation needed to test a market maker honestly.
Why do most market makers lose to informed traders?
Because the traders who choose to hit a quote often know something the quote does not. A market maker that ignores this fills mostly on the wrong side of the next move. The course measures that cost from fills and shows how quotes are moved to defend against it.
How is the course taught?
Audio lessons give the general subject, explainer films show quotes, inventory and the order book moving tick by tick, and the workbooks hold derivations, notebooks and cheat sheets. Assignments and the project receive written feedback from the faculty.
Who is this course for?
Quants and developers aiming at electronic market making, high-frequency or crypto liquidity desks. It counts toward the Certificate in High-Frequency Trading and Market Microstructure and so toward the Professional Diploma in Algorithmic Trading.
What you will be able to do
- Explain how a market maker earns the spread and what inventory and adverse selection cost it.
- Derive and implement optimal bid and ask quotes under inventory risk.
- Measure adverse selection from fills and adjust quotes to informed flow.
- Simulate and evaluate a market making strategy on order book data with queue position.
Syllabus, module by module
What market makers do
Liquidity provision, designated and electronic market makers, rebates and obligations.
Inventory risk
Why holding a position is the market maker's main risk, and skewing quotes to shed it.
Adverse selection
Informed flow, the Glosten-Milgrom and Kyle models, and markouts after fills.
Optimal quoting
The Avellaneda-Stoikov model, its extensions and closed-form approximations.
Queues and fills
Queue position, fill probability and simulating a passive order realistically.
Testing a market maker
Profit decomposition, inventory limits, and markets from equities to crypto.
How the certificate is earned
Graded assignments and a final project: a market making strategy simulated on order book data, with inventory limits and a written analysis of its profit sources. On a pass you receive the Course certificate in Market Making, issued by the Institute with a verification code. Read how certification works.
Before you start
Limit order books and probability at the Institute's level.
This course counts toward
- Certificate in High-Frequency Trading and Market MicrostructureOne semester of nine courses and a capstone on how orders meet: the limit order book, execution algorithms and their costs, venue routing, market making and the C++ systems that run them.
- Professional Diploma in Algorithmic TradingThe top credential on the practitioner path. Four semesters, 41 courses and a 160-hour capstone covering everything between the mathematics and a book you could defend to a risk committee.
Questions applicants ask
How do market makers make money?
They buy at the bid and sell at the ask many times a day, keeping the spread. They lose when prices move against the inventory they hold or when they trade with better-informed traders, and their skill is in limiting those losses.
Can a market making strategy be backtested?
Only with care. A passive order fills only if it reaches the front of the queue, and fills tend to come just before adverse moves. The course builds a simulator that models queue position and markouts.