Market Taker/Maker

Aside from setting spread as a parameter per symbol, there's not much you can do easily. There are moderately complicated papers on spread estimation models, but one I tried wasn't very accurate at all except for very liquid symbols. Also, I've considered data mining spreads and inputting them live to algo for better estimates, but that's a lot of effort for an auxiliary feature.

Then there's the option of buying data of course which while expensive solves the issue in a straightforward manner. ;)

Actually, there's one more: Volatility for high resolution trade is likely to reflect the spread. So if you have tick or second resolution, you can probably ensure you place orders outside spreads in the majority of cases by offsetting last trade price by a function of volatility when calculating limit. I don't make an attempt for an exact formula here, it's just my observation you can probably get by with tweaking this until offset is larger than spread / 2 on average.

Hi Petter,

These are great ideas. The last option especially is brilliant. Because even if we had Level II data, still the dark side of the market will have offers that we are not aware of. So, as long as we get closer to the other side of the spread, that's the best guess.

The only question is, when IB for instance offers an incentive for market makers, should all of the orders be market making? or they calculate the fees separately for maker and taker orders?

Example: IB's tiered model starts from 300,000 shares per month. If we trade 300,000 shares and only 200,000 of them are market maker and the rest is taker, how do they calculate the fees?

If nobody has an answer for this I will call them and will update this thread with their answer.

I'm unsure of whether this applies to IB at all; they might hide market taking fee behind their own fees, or is it somehow charged as a part of slippage. I suggest you hear with them, and please let me know what their answer is. A book I'm ever so slowly reading on HFT discusses this rebate a lot so I guess it's supposed to be important at higher trade frequencies.

Sure thing! if I get a chance tomorrow, I will call them.

BTW, could you share your book's title with us? Thanks!

Aldridge - High Frequency Trading, A Practical Guide to Algorithmic Strategies and Trading Systems

To be honest a lot of that book isn't very relevant to building medium freq strategies (it has a more general scope), but it teaches plenty of stuff I didn't know about so I'm happy.

Agreed. HFT changes every day and by the time that a book is published and finally read, the solutions could be already obsolete. But it's the ideas and learning the market that is very important especially for people like us who are not exactly traders but rather techies :)

Also I usually try to not learn pattern-like solutions because they won't let you think out of the box. Although on the other hand, if you don't learn them, you tend to make mistakes of trying to invent the wheel. So, the key is how to read ideas without letting them stop your creativity. Obviously a very difficult thing to do!

One more question. When you place a Market order, isn't that considered as adding liquidity? because basically you are taking any price that market provides to you!