The goal of every market-maker is to buy low and sell high. The hard part is knowing exactly when to sell.
Ideally, a market-maker will exit a position when a client meets the ask price or the price hits an upper barrier – the take profit level. Less ideally, a position will be liquidated when it reaches the end of its holding period or hits the lower price level, the stop loss.
Over the past two years, David Shelton, who leads a team of quants focused on electronic trading of foreign exchange and fixed income products at Bank of America in London, has been working on a method to generate clear signals on when market-makers should liquidate positions. The resulting solution is presented in a paper he co-wrote with Carlos Veiga, a senior quantitative financial analyst at BofA, which was published in FX Markets’…
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