Let’s say I’m a market maker. Assuming there’s no way for me to hedge my position when my quote is taken, how do I get out of my position when someone hit my quote?
The standard way to do this is to “lean” on your position. If my estimated price of something is $100 and someone bought against me, then I’ll adjust my estimated price to something like $101. The more position I’m holding right now, the more I adjust. When the adjusted price moves too far away from my quotes, I pull my quote back. That’s why when you trade against market makers, you might get a worse price for your next order.
Let’s say I’m a market maker. Assuming there’s no way for me to hedge my position when my quote is taken, how do I get out of my position when someone hit my quote?
The standard way to do this is to “lean” on your position. If my estimated price of something is $100 and someone bought against me, then I’ll adjust my estimated price to something like $101. The more position I’m holding right now, the more I adjust. When the adjusted price moves too far away from my quotes, I pull my quote back. That’s why when you trade against market makers, you might get a worse price for your next order.