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How Automated Trading 

Enables Market Making?

To be efficient, market makers should be 
able to adjust their quotes immediately in 
response to market events.

These events could be:

• 

changes in prices of financial instruments 

• 

trading positions accumulated by the 
market maker

Automated systems are more efficient than 
human beings in detecting & responding 
to such events. Therefore they can handle 
their risks better. Since automated systems 
can handle their risks better, therefore they 
offer better quotes for others.

Faster Response Time

Pricing of derivatives that enable investors 
to hedge often involve time consuming 

mathematical calculations. While humans 
can take minutes, automated systems can 
do these calculations in microseconds. The 
response time is therefore much faster.

Scalability

Human traders can only track activities 
in a few instruments, while automated 
systems can do thousands simultaneously. 
The same trader using an automated 
trading system provides liquidity in 
significantly more financial instruments 
simultaneously.

Availability

Machines do not have to take breaks. 
Automated market making systems are 
always active.

What is the Impact of 

Algorithmic Market Makers 

on Markets?

Price Volatility

Difference between prices of consecutive 
trades done against a human market 
maker will be much higher than those 
done against an automated market maker, 
asset price volatility therefore reduces.

Impact Cost

With automation rendering market making 
easy, order books have become thick. 
Execution price for even big orders are 
close to fair price, impact cost & volatility 
is thus lower.

The overall impact of algorithmic Market 
Making can be summed up as mentioned 
below:

Reduce indirect 

costs paid as 

bid-ask spreads

Increased 

liquidity across 

the board

Reduced impact 

cost (while 

trading big 

sizers)

Algorithmic 

Market Making 

has therefore 

provided the 

following 

benefits:

Made 

markets less 

volatile

Introduced 

liquidity in 

hedging 

derivatives

Efficiently 

Priced Markets 

(by interaction 

with 

arbitrageurs

COVER STORY

Benefits of Algorithmic Market Makers