The Market Maker's Dilemma: Navigating the Fill Probability vs. Post-Fill Returns Trade-Off

TL;DR

This paper investigates the trade-off between fill probability and post-fill returns in market making, revealing that contrarian strategies are often necessary and more profitable due to the interplay of order book mechanics and short-term price dynamics.

Contribution

It introduces a model of reversals where contrarian market making strategies outperform traditional approaches by exploiting order book imbalances.

Findings

Negative correlation between fill likelihood and returns

Contrarian strategies can be more profitable in certain conditions

Common strategies are often unprofitable due to these dynamics

Abstract

Using data from a live trading experiment on the Binance Bitcoin perpetual, we examine the effects of (i) basic order book mechanics and (ii) the persistence of price changes from immediate to short timescales, revealing the interplay between returns, queue sizes, and orders' queue positions. We document a fundamental trade-off: a negative correlation between maker fill likelihood and post-fill returns. This dictates that viable maker strategies often require a contrarian approach, counter-trading the prevailing order book imbalance. These dynamics render commonly-cited strategies highly unprofitable, leading us to model `Reversals': situations where a contrarian maker strategy at the touch proves effective.