Market-making – profiting on liquidity provision and associated risks
We already considered market-making in detail in the Market makers – comfortable, sophisticated, expensive section in Chapter 3, FX Market Overview from a Developer’s Standpoint, so there’s no need to repeat ourselves here. We will mention market-making here only for consistency as an example of a sell-side trading strategy. If we want to classify market-making as pertaining to alpha- or beta-generating strategies, probably we could qualify it as beta-generating. However, at the same time, high values of beta are harmful to market-making. In general, market making requires the trader not only to be sufficiently funded but also to meet various regulatory requirements, which makes this activity available mostly to institutions.
This is no surprise that market making requires not only direct access to the order book, with the ability to update the best bid and ask there, but also assumes...