Learn / Library / Market making

Order size matters

Market makingMedium

A share $0.9$ of orders are retail orders for $1$ unit each, on which the market maker earns $1$ per unit. A share $0.1$ of orders are informed orders for $5$ units each, on which the market maker loses $2$ per unit. What is the expected profit per order?

Checking an answer needs JavaScript. The hint and the solution open without it.

Hint

Multiply edge per unit by units for each type.

Solution

A retail order earns $1 \times 1 = 1$ , and an informed order loses $5 \times 2 = 10$ .
The expected profit is $0.9 \times 1 - 0.1 \times 10$ .
This equals $- 0.1$ .

Answer: $- 0.1$

Next question Back to the library