Strategies · Library · Stocks
§3.19Liquidity
Market-making
Post buy orders at the bid and sell orders at the ask to earn the spread. It struggles when informed traders trade against you, so makers add short-term direction signals and rely on speed to stay first in the queue.
- Asset class
- Stocks
- Held for
- Intraday
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Short-horizon price direction signal, with the quoted spread and order queue position.
- Entry and exit
- Quote continuously; update or cancel as the signal and book change.
- Sizing
- Small size per quote, inventory-limited.
How it fails
- Adverse selection by informed flow
- Needs low-latency infrastructure
- Inventory risk
Data it needs
- order books
- tick data
ARCANE has no order books or tick data.
How ARCANE uses it
Not usable for Calls or Alpha.
Needs order-book and intraday data.
Filed under the liquidity card
Thinly traded assets pay a premium for being hard to sell. Hold them for it in calm markets; when trading thins across the market, cut size and move to the most liquid way to hold the view.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.19, p. 59 of the SSRN version. Described in our words. Liquidity is ARCANE’s filing, not the book’s.