Automated Options Market Making

Baltazar · Post by **Baltazar** » Tue Nov 18, 2008 9:16 am

Actually i think automation is more for vanillas than exotic since you want to trade big volumes very fast.

Note that you are touching a sensitive subject as it is the core business of some shops and they won't disclose their degree of automation.

Streaming quote can be the result of a fully automatic system or a junior trader pressing buttons, i don't think that tells all.

Note that a market maker does not generate buy/sell signals as he posts bid-asks (shifted toward a direction maybe). Generating signal is usually more a market taking approach as pointed out by ax. Of course any market maker is doing a bit of prop trading as well so uses signal internally but that's a different story.

I suspect looking at who does the biggest volume in option (if such a thing is published) is an indication, checking registred market makers as well. A shop with a good algo is probably MMaker in many similar instruments.

ag987654321 · Post by **ag987654321** » Wed Dec 10, 2008 10:42 pm

Knight trading are in this space..

Alot of people have a vol surface that they use to price off and run the whole thing as an inventory based model- get paid move the price up.. adjust the vol/smile and make the next price kind of thing..

and very most of the automated stuff is in vanilla exchange stuff

athletico · Post by **athletico** » Thu Dec 11, 2008 3:35 am

What I'm curious most is if people usually move their vols as their inventory changes, or if they have a different way of charging risk premium. On the surface AMM seems like a nonlinear problem, i.e. the marginal edge I require for the 1st option I sell < marginal edge for the 500th option, so I don't see how simply moving vols would work.

Baltazar · Post by **Baltazar** » Thu Dec 11, 2008 9:12 am

I think it makes more sense to have two systems: one that adjust the vol and one that adjust the quotes based on vol and inventory.

in the end you just move prices based on inventory but if you work with your vol surface how do you make sure, for example, you don't buy too much dividend?

ag987654321 · Post by **ag987654321** » Thu Dec 11, 2008 5:52 pm

I am telling you what they do... they move vol and manage inventory in separate processes.

If an option strike is being bought or sold they will shade the price of that particular strike... that of course has implied vol implications so they will keep showing an axe but will have changed the vol surface to be buying cheaper options/selling expensive options around the strike/date that is in demand..

Hope that makes things clearer

ZeroBeta · Post by **ZeroBeta** » Thu Dec 11, 2008 6:43 pm

"showing an axe" means what?

ig0r · Post by **ig0r** » Thu Dec 11, 2008 6:45 pm

lol I'm guessing an offer

filthy · Post by **filthy** » Thu Dec 11, 2008 7:07 pm

it is from "having an axe to grind". it means that are much more inclined to trade on one side of the spread than the other.

Baltazar · Post by **Baltazar** » Fri Dec 12, 2008 9:06 am

of course in liquid market one could also play with asymmetric volumes for the quotes instead (depending if the exchange permits obviously).

Jurassic · Post by **Jurassic** » Sun Jul 15, 2018 9:41 pm

> Note that a market maker does not generate buy/sell signals as he posts bid-asks (shifted toward a direction maybe).

@Baltazar how do they determine bid-asks without a signal?