Quote Duration Algorithms are automated routines engineered to determine the active lifespan or validity period for a generated price quote in financial markets, particularly within Request for Quote (RFQ) systems for crypto options. Their fundamental purpose is to manage the market maker’s exposure to price risk. They define how long a quoted price remains binding.
Mechanism
These algorithms dynamically calculate a quote’s expiry time by analyzing various factors, including current market volatility, the size of the requested order, the remaining time to expiry of the underlying option, and the market maker’s present inventory levels. Quotes for assets exhibiting higher volatility or larger sizes typically receive shorter validity durations.
Methodology
The strategic approach employed by quote duration algorithms aims to minimize the market maker’s susceptibility to stale prices and adverse selection, especially crucial in rapidly moving cryptocurrency markets. By intelligently adjusting quote durations, market makers control the temporal window during which their quoted price is actionable, thereby mitigating the risk of significant price changes before a trade can be finalized.
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