Learn / Library / Market making
Quotes that follow inventory
Fair value is fixed at . A market maker quotes bid = and ask = , where is the current inventory in units (negative when short). Starting from , a counterparty sells to the bid, then sells to the new bid, then buys from the new ask, then sells to the new bid, one unit each time, with quotes updated after every trade. What is the total profit after the last trade, with the inventory marked at ?
Checking an answer needs JavaScript. The hint and the solution open without it.
Hint
Track the inventory and recompute both quotes after each fill.
Solution
- Buying at (q = ), then at (q = ), then selling at (q = ), then buying at (q = ).
- Cash is and the final inventory is units worth .
- The total profit is .
Answer: