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Optimal Quoting under Adverse Selection and Price Reading

Author

Listed:
  • Alexander Barzykin
  • Philippe Bergault
  • Olivier Gu'eant
  • Malo Lemmel

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.

Suggested Citation

  • Alexander Barzykin & Philippe Bergault & Olivier Gu'eant & Malo Lemmel, 2025. "Optimal Quoting under Adverse Selection and Price Reading," Papers 2508.20225, arXiv.org.
  • Handle: RePEc:arx:papers:2508.20225
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    References listed on IDEAS

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    2. Alexander Barzykin & Philippe Bergault & Olivier Guéant, 2024. "Algorithmic Market Making in Spot Precious Metals," Working Papers hal-04577061, HAL.
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    4. Butz, M. & Oomen, R., 2019. "Internalisation by electronic FX spot dealers," LSE Research Online Documents on Economics 90485, London School of Economics and Political Science, LSE Library.
    5. Alexander Barzykin & Philippe Bergault & Olivier Guéant, 2023. "Algorithmic market making in dealer markets with hedging and market impact," Mathematical Finance, Wiley Blackwell, vol. 33(1), pages 41-79, January.
    6. Philippe Bergault & David Evangelista & Olivier Guéant & Douglas Vieira, 2021. "Closed-form Approximations in Multi-asset Market Making," Applied Mathematical Finance, Taylor & Francis Journals, vol. 28(2), pages 101-142, March.
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