EMM in more illiquid markets

Jurassic · Post by **Jurassic** » Wed May 15, 2019 11:14 am

I dont understand how electronic market making in banks in more illiquid products works. Im not looking for a deeply technical (ie mathematical answer).

As I understand, if you get an order from client you ideally want to instantly receive bid-offer for that. If you cannot do this I assume you want to partially fill the order, but this still leaves you with a remaining order which must be added to some inventory. In a somewhat liquid market this could be executed like an execution algo on the buyside. However, in a more illiquid market the price may move against you? How do you deal with the remaining inventory? Whats the general idea?

tbretagn · Post by **tbretagn** » Wed May 15, 2019 1:55 pm

Two things:

a) That's what bid-offer is supposed to help you contain

b) Inventory on beta products

If it's really illiquid (for example ARS in FX), there's usually someone behind the toy. The platform is electronic, but the market-making isn't in that sense.

Jurassic · Post by **Jurassic** » Wed May 15, 2019 3:44 pm

a) the "strategy" is to work out how long it statistically takes you to get out?

b) how does this help?

Jurassic · Post by **Jurassic** » Sun Jun 02, 2019 2:57 pm

a) I think I understand but b) I have no idea

nikol · Post by **nikol** » Sun Jun 02, 2019 4:32 pm

b) beta products = vol ~ option or insurance

i would add gas & temperature as proxy of electricity

Jurassic · Post by **Jurassic** » Wed Jun 12, 2019 12:17 pm

@nikol I have no idea what you mean

nikol · Post by **nikol** » Wed Jun 12, 2019 10:06 pm

absorb this

Alpha and beta for beginners

Jurassic · Post by **Jurassic** » Thu Jun 13, 2019 7:57 am

@nikol no i understand what they are

nikol · Post by **nikol** » Thu Jun 13, 2019 10:58 am

In any trade there is a risk to have a loss. It is natural to ask compensation for that risk at the moment of negotiation of trade. There are two ways:

- add risk margin (apart from commercial one). This widens bid-ask

- buy protection (insurance product). It is function of volatility, hence beta. But then, again, you want to transfer this price to the counterparty.

Under risk-neutral expectation both ways should deliver same result, but there are always inefficiencies making one way cheaper than the other.

In this liquidity does not matter. In illiquid market you have less information, more uncertainty, which you price in as risk (see above).

Jurassic · Post by **Jurassic** » Thu Jun 13, 2019 12:52 pm

buy protection (insurance product). It is function of volatility, hence beta. But then, again, you want to transfer this price to the counterparty.

Under risk-neutral expectation both ways should deliver same result, but there are always inefficiencies making one way cheaper than the other.

This is the bit I dont understand. Is there anywhere I can read about it online?