Backtest Market Making

Discussion in 'Automated Trading' started by maninmoon, May 6, 2010.

  1. Hi,

    I am looking for ideas as to how to test a market making strategy. Trading aggressively (price-taker) is easier to backtest, put putting prices into market is harder.

    Any tips?


    PS: Are there any other forums for automated traders?
  2. Market making is really hard to backtest because your limit orders will really effect things.

    Especially when there is a spread more than .01 -- if your ATS tried to match the inside market, another ats will often jump your price by a penny so they have the inside market. This can happen repeatedly in rapid succession.

    So, I think you have to get theoretical and read some models of market microstructure and then just test things out. This can get expensive.
  3. I am thinking about FX, so not sure there is a lot of micro-structure data available - unlike on the exchanges
  4. How do you plan to compete with the main liquidity providers (banks) in this field?

    I assume you are aware of the fact that the structure of otc forex is very different from equities.
  5. I am not sure I am directly competing. Although I will in effect be providing liquidity for short periods - that's not the reason for doing it!

    This is an alpha generating model, but I want to use orders to get long at the Bid or short at the Ask.

    Do you have any experience of simulating this?
  6. I have never traded FX. However, my understanding is that it works very differently than equities and there is no central exchange. So, when you are offering liquidity, not everyone "sees" it and your broker will take your liquidity only when it is advantageous to them?
  7. rosy2


    FX futures or spot? If its spot, can individuals provide liquidity? I thought you always are a taker, and even if you place a limit order inside the market it doesnt get displayed. Am i wrong?
  8. Yes, you are wrong. But it's confusing at best...

    There are generally 3 different models for trading spot fx (let's forget about retail fx platforms):

    1: Single bank platforms
    2: Multibank platforms (aggregators)
    3: ECN's

    On 1. and 2. you are trading on the prices that the dealing banks are willing to trade with you. That is, you can only be the price taker.

    Then there exist various ECN's where you can act as price maker (i.e. your order will be displayed to other participants on the ECN). However, each ECN have their own rules and setups. For example at some ECN's you can only trade with other participants if they use the same prime broker.
    Also, most ECN's operates as hybrids, where the liquidity shown is a mix of liquidity from multiple bank streams (like in 2.) and liquidity from participants on the ECN (external and internal liquidity).

    On top of this you have EBS and Reuters which are considered the "true" interbank market. But these are not easily accessible.
  9. nidarian


    Market making in FX from your couch? You are wasting your time.
  10. BlackMage

    I checked through some of your other posts and I notice you mention that simulating Marking Making was very difficult - but I got the impression you had made some inroads...

    Have you found a way to make your backtest have some similarity to real life?
    #10     May 10, 2010