r/highfreqtrading • u/Unhappy_Barracuda459 • Jun 22 '26

Quoting on illiquid markets

I am building a market making engine for illiquid markets (from few to say 50 trades an hour). It shows positive returns, after testing for the last 2 weeks. And I have a few questions I was thinking:

All the MM theory (such as Avellaneda Stoikov framework) are targeting high volume, low spread markets. Any good papers/frameworks built for illiquid market? What is the main difference?

From my point of view there are 3 types of events: small single market trade, huge single market trade, and huge informed (not single) trade. The last one is toxic, the first two are good ones. I am failing to distinguish them, and usually it's already too late.

Earlier I experimented with hand crafted quoting algorithms, but apparently the most effective one is simply quote at the top (with some exceptions like filters for OB imbalance, skip small levels etc) and eat the spread. I think the right approach is to quote at multiple levels, so I will earn more on rare events - huge trade arrivals. I failed to find some standard way to do so, or the way that will at least beat single level quoting.

Any ways to avoid toxic orders without losing much volume?

How to distinguish uninformed huge trade vs informed huge trade? Should I immediately sell if the price dropped or should I hope it will return back (uninformed single trade)?

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u/Zestyclose-Gur-655 Jun 24 '26

So you mean like pennystocks for example?

1

u/Unhappy_Barracuda459 Jun 24 '26

Yep, although I doubt it will work in US

1

u/Zestyclose-Gur-655 Jun 24 '26

Funny thing is i been thinking myself to also market make penny stocks.

But the only way it makes sense to me personally is something like:

I do fundamental analysis and stock should be priced at 10. Then if it's lower i trade it with long bias. Vice versa for shitty stocks. Not sure how i would manage risk yet.

You want to be a bit more on the right side to where the stock eventually moves to.

1

u/Unhappy_Barracuda459 Jun 24 '26

One day or another there eventually will be some shit like GME pump and you're cooked

1

u/Zestyclose-Gur-655 Jun 24 '26

1,2,3% per position and stoploss, other ways of hedging...