Optimal Quoting under Adverse Selection and Price Reading

Over the past decade, many dealers have implemented algorithmic models to automatically respond to RFQs and manage flows originating from their electronic platforms. In parallel, building on the foundational work of Ho and Stoll, and later Avellaneda and Stoikov, the academic literature on market making has expanded to address trade size distributions, client tiering, complex price dynamics, alpha signals, and the internalization versus externalization dilemma in markets with dealer-to-client and interdealer-broker segments. In this paper, we tackle two critical dimensions: adverse selection, arising from the presence of informed traders, and price reading, whereby the market maker's own quotes inadvertently reveal the direction of their inventory. These risks are well known to practitioners, who routinely face informed flows and algorithms capable of extracting signals from quoting behavior. Yet they have received limited attention in the quantitative finance literature, beyond stylized toy models with limited actionability. Extending the existing literature, we propose a tractable and implementable framework that enables market makers to adjust their quotes with greater awareness of informational risk.

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ArXiv.org
Published
2025-08-27
Primary Topic
Financial Markets and Investment Strategies
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article
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article

Optimal Quoting under Adverse Selection and Price Reading

Alexander Barzykin, Olivier Guéant, Philippe Bergault, Malo Lemmel
ArXiv.org
Financial Markets and Investment Strategies
article

Optimal Quoting under Adverse Selection and Price Reading

Alexander Barzykin, Olivier Guéant, Philippe Bergault, Malo Lemmel
article en

Abstract

Over the past decade, many dealers have implemented algorithmic models to automatically respond to RFQs and manage flows originating from their electronic platforms. In parallel, building on the foundational work of Ho and Stoll, and later Avellaneda and Stoikov, the academic literature on market making has expanded to address trade size distributions, client tiering, complex price dynamics, alpha signals, and the internalization versus externalization dilemma in markets with dealer-to-client and interdealer-broker segments. In this paper, we tackle two critical dimensions: adverse selection, arising from the presence of informed traders, and price reading, whereby the market maker's own quotes inadvertently reveal the direction of their inventory. These risks are well known to practitioners, who routinely face informed flows and algorithms capable of extracting signals from quoting behavior. Yet they have received limited attention in the quantitative finance literature, beyond stylized toy models with limited actionability. Extending the existing literature, we propose a tractable and implementable framework that enables market makers to adjust their quotes with greater awareness of informational risk.

ArXiv.org
Université Paris Cité (FR), Sorbonne Paris Cité (FR), Laboratoire de Probabilités et Modèles Aléatoires (FR), Laboratoire de Probabilités, Statistique et Modélisation (FR)
Openalex Percentile: Top 51%
Financial Markets and Investment Strategies
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Optimal Quoting under Adverse Selection and Price Reading — Alexander Barzykin, Olivier Guéant, et al. · ArXiv.org (2025) | TGRS Research Map | TGRS