Market Making
This guide covers advanced strategies for providing liquidity on Seesaw markets.
What is Market Making?
Market makers provide liquidity by:
- Placing both buy and sell orders
- Earning the bid-ask spread
- Collecting maker rebates
Earning from the Spread
The Spread Concept
Bid @ 5400 | Ask @ 5600
Spread = 5600 - 5400 = 200 bps (2%)
When both sides fill:
- Buy 100 shares @ 5400 = Pay 54 USDC
- Sell 100 shares @ 5600 = Receive 56 USDC
- Profit = 2 USDC (before fees)
Fee Economics
| Component | Rate | Direction |
|---|---|---|
| Taker Fee | 30 bps | Paid by taker |
| Maker Rebate | 10 bps | Earned by maker |
Maker's Advantage: As a maker, you earn rebates instead of paying fees.
Market Making Strategy
Basic Two-Sided Quoting
Calculating Quotes
Given:
- Mid price: 5500 bps
- Target spread: 200 bps
Bid = 5500 - 100 = 5400 bps
Ask = 5500 + 100 = 5600 bps
Post-Only Orders
Use Post-Only order type to ensure you're always the maker:
| Order Type | If Would Match | Result |
|---|---|---|
| Limit | Matches immediately | Become taker (pay fee) |
| Post-Only | Rejects | No trade (save fee) |
Inventory Management
The Inventory Problem
As you make markets, you accumulate inventory:
Skewing Quotes
Adjust prices based on inventory:
| Inventory | Skew | Effect |
|---|---|---|
| Long YES | Lower bids, raise asks | Encourage selling YES to you |
| Long NO | Raise bids, lower asks | Encourage buying YES from you |
| Neutral | Symmetric quotes | Balanced fill probability |
Example Skew Calculation
Base mid: 5500 bps
Inventory: +50 YES (long YES)
Skew factor: 2 bps per share
Adjusted mid = 5500 - (50 × 2) = 5400 bps
New bid = 5300 bps
New ask = 5500 bps
Risk Management
Delta Exposure
Your directional exposure:
Delta = YES_shares - NO_shares
Delta > 0: Profit if UP
Delta < 0: Profit if DOWN
Delta = 0: Neutral
Position Limits
Set maximum inventory:
| Metric | Limit | Action When Exceeded |
|---|---|---|
| Max YES | 500 shares | Stop bidding |
| Max NO | 500 shares | Stop offering |
| Net delta | 200 shares | Aggressive skew |
Stop-Loss Strategy
Order Book Management
Optimal Quote Placement
Consider tick size (default 100 bps):
Best bid: 5400
Best ask: 5600
Options:
1. Match best: Bid 5400, Ask 5600 (tight, quick fills)
2. Improve: Bid 5500, Ask 5500 (cross - not allowed!)
3. Behind: Bid 5300, Ask 5700 (wide, slower fills)
Order Sizing
Balance between:
- Large orders: More potential profit, more inventory risk
- Small orders: Less risk, need more orders for same profit
Order Limits
Remember: Maximum 64 orders per side per market.
Profitability Analysis
Expected Value
For a single round-trip:
EV = (spread × quantity / 10000) - fees + rebates
Example:
Spread: 200 bps
Quantity: 100 shares
Taker fee: 0 (you're maker)
Maker rebate: 10 bps × quantity = 0.10 USDC
EV = (200 × 100 / 10000) + 0.10 = 2.10 USDC
Breakeven Spread
Minimum spread to profit after fees:
Minimum spread = Taker fee - Maker rebate
= 30 bps - 10 bps = 20 bps
(But need margin for inventory risk)
Risk-Adjusted Returns
Sharpe Ratio = (Expected Return - Risk-Free Rate) / Volatility
Automation Requirements
Successful market making requires:
| Requirement | Description |
|---|---|
| Fast Execution | Sub-second order updates |
| Position Tracking | Real-time inventory monitoring |
| Quote Engine | Automatic price calculation |
| Risk Limits | Automatic position limits |
| Connectivity | Reliable RPC connections |
See Automation for implementation details.
Market Making Checklist
Before Starting
- Understand the asset being traded
- Calculate required capital
- Set inventory limits
- Define spread targets
- Prepare monitoring tools
During Trading
- Monitor fills and inventory
- Adjust quotes as needed
- Track P&L continuously
- Watch for oracle issues
- Manage time remaining
Before Market End
- Cancel all orders before t_end
- Assess final inventory
- Calculate expected settlement
- Prepare for next market
Common Pitfalls
| Pitfall | Consequence | Prevention |
|---|---|---|
| Inventory buildup | Large directional exposure | Aggressive skewing |
| Slow updates | Stale quotes, adverse selection | Better infrastructure |
| Ignoring time | Trading into resolution | Time-based limits |
| Over-sizing | Large losses | Position limits |
| Tight spreads | Negative EV | Minimum spread rules |
Example Strategy
Conservative Market Maker
Parameters:
- Spread: 400 bps (2% each side)
- Order size: 50 shares
- Max inventory: 200 shares
- Skew: 1 bps per share of inventory
Aggressive Market Maker
Parameters:
- Spread: 200 bps (1% each side)
- Order size: 100 shares
- Max inventory: 500 shares
- Skew: 0.5 bps per share
Higher risk, higher potential return.
Next Steps
- Implement Automation for systematic trading
- Review Risks for comprehensive risk management