How much size should you show on your quote?

Question

You quote a 2-cent half-spread and your fair value is solid. You're deciding how much size to display. Showing more size wins you more of the passive flow, but if a fill turns out to be informed, the value gaps about 20 cents against your whole position before you can react. Frame the trade-off. If you're willing to risk at most \2{,}000 on any single fill, what clip should you show?

Accepted Answer

The two sides of size. Let Q be the size you display on each quote. - Upside (good fill): you earn the half-spread on the whole clip, 0.02 	imes Q. - Downside (toxic fill): the value gaps \0.20 against your whole clip, costing 0.20 	imes Q. Notice the downside is 10	imes the upside per share (20 cents vs 2 cents). Size is a double-edged lever: it multiplies both your spread income and your worst-case loss linearly, but the loss dwarfs the gain when a fill is toxic. Apply the risk cap. You'll tolerate at most \2{,}000 of loss on a single fill. The worst-case loss is 0.20 	imes Q, so 0.20 \…

How much size should you show on your quote?

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