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FX Market Making with Internal Liquidity

Author

Listed:
  • Alexander Barzykin
  • Robert Boyce
  • Eyal Neuman

Abstract

As the FX markets continue to evolve, many institutions have started offering passive access to their internal liquidity pools. Market makers act as principal and have the opportunity to fill those orders as part of their risk management, or they may choose to adjust pricing to their external OTC franchise to facilitate the matching flow. It is, a priori, unclear how the strategies managing internal liquidity should depend on market condions, the market maker's risk appetite, and the placement algorithms deployed by participating clients. The market maker's actions in the presence of passive orders are relevant not only for their own objectives, but also for those liquidity providers who have certain expectations of the execution speed. In this work, we investigate the optimal multi-objective strategy of a market maker with an option to take liquidity on an internal exchange, and draw important qualitative insights for real-world trading.

Suggested Citation

  • Alexander Barzykin & Robert Boyce & Eyal Neuman, 2025. "FX Market Making with Internal Liquidity," Papers 2512.04603, arXiv.org.
    • Handle: RePEc:arx:papers:2512.04603
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    References listed on IDEAS

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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. Youssef Ouazzani Chahdi & Mathieu Rosenbaum & Gr'egoire Szymanski, 2024. "A theory of passive market impact," Papers 2412.07461, arXiv.org.
    6. M. Butz & R. Oomen, 2019. "Internalisation by electronic FX spot dealers," Quantitative Finance, Taylor & Francis Journals, vol. 19(1), pages 35-56, January.
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