Greed Makes Markets: Market Making From First Principles With an HFT Quant
Notes de l’épisode
How does market making actually work? In this lecture, former high-frequency trader Annanay Kapila (Flow Traders, Tower Research Capital; founder & CEO of QFEX) breaks down the mechanics of market making from first principles. He maps the systematic trading landscape—prop trading vs hedge funds, HFT vs mid-frequency—and explains why market making sits in the high-Sharpe, proprietary quadrant. You'll learn how a central limit order book (CLOB) works, how arbitrage-free pricing pins down fair value (theo), and why the mid-price between best bid and best ask is the market's best estimate of a stock's true price.From there, the lecture gets into the real edge mechanics: quoting around fair value, edge per share, queue priority, and adverse selection—the hidden cost that punishes market makers when their fair value model is wrong. Annanay walks through how competition between market makers compresses the bid-offer spread, why thick books (large-cap US equities trading $10B+ a day) offer lower transaction costs than thin books, and how quant firms size their quotes based on confidence in their fair value models. Essential viewing for aspiring quants, traders, MFE students, and anyone who wants to understand market microstructure, liquidity provision, and how high-frequency trading firms actually make money.