{"id":4602,"date":"2023-04-13T09:04:57","date_gmt":"2023-04-13T09:04:57","guid":{"rendered":"https:\/\/prosperity.newai.com.au\/?p=4602"},"modified":"2025-04-13T10:45:24","modified_gmt":"2025-04-13T10:45:24","slug":"strategic-shift-in-round-2-from-market-making-to-pair-trading","status":"publish","type":"post","link":"https:\/\/prosperity.newai.com.au\/index.php\/2023\/04\/13\/strategic-shift-in-round-2-from-market-making-to-pair-trading\/","title":{"rendered":"Strategic Shift in Round 2: From Market Making to Pair Trading"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"4602\" class=\"elementor elementor-4602\">\n\t\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-bcf3779 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"bcf3779\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-68e81c5\" data-id=\"68e81c5\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-6cc2bb7 elementor-widget elementor-widget-text-editor\" data-id=\"6cc2bb7\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.6.7 - 03-07-2022 *\/\n.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#818a91;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#818a91;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block}<\/style>\t\t\t\t<p>The first round results were decent. In Round 2, two new products were introduced &#8211; let&#8217;s call them C and PC. Looking at their price movements, they showed high correlation, which was confirmed by calculating their price change correlation. This strongly suggested pair trading potential.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-d90ab9e elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"d90ab9e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-bf260f4\" data-id=\"bf260f4\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-ab72b79 elementor-widget elementor-widget-image\" data-id=\"ab72b79\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.6.7 - 03-07-2022 *\/\n.elementor-widget-image{text-align:center}.elementor-widget-image a{display:inline-block}.elementor-widget-image a img[src$=\".svg\"]{width:48px}.elementor-widget-image img{vertical-align:middle;display:inline-block}<\/style>\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"1147\" height=\"763\" src=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-3.jpg\" class=\"attachment-full size-full\" alt=\"\" srcset=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-3.jpg 1147w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-3-300x200.jpg 300w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-3-1024x681.jpg 1024w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-3-768x511.jpg 768w\" sizes=\"auto, (max-width: 1147px) 100vw, 1147px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-7adc4d9 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"7adc4d9\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-57543ba\" data-id=\"57543ba\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-a8972b0 elementor-widget elementor-widget-text-editor\" data-id=\"a8972b0\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>I analyzed historical trading data to estimate theoretical market making profits across all four products using:<br \/><b>PnL = abs(trade_price &#8211; mid_price) * quantity<\/b><br \/>The results showed significantly lower profits for the new products compared to the original ones. Additionally, the average bid-ask spread for the new products was only around 2.x, much tighter than the previous 4.x spreads, making market making both more difficult and less profitable. With limited time, I decided to focus solely on taking strategies for the new products.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-3eec418 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"3eec418\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-5e55182\" data-id=\"5e55182\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-6843ae1 elementor-widget elementor-widget-image\" data-id=\"6843ae1\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"2160\" height=\"1080\" src=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4.jpg\" class=\"attachment-full size-full\" alt=\"\" srcset=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4.jpg 2160w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4-300x150.jpg 300w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4-1024x512.jpg 1024w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4-768x384.jpg 768w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4-1536x768.jpg 1536w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/7-4-2048x1024.jpg 2048w\" sizes=\"auto, (max-width: 2160px) 100vw, 2160px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-4bf774d elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"4bf774d\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-ccf858b\" data-id=\"ccf858b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-6f7617d elementor-widget elementor-widget-text-editor\" data-id=\"6f7617d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>For the pair trading approach:<br>\u2981 C&#8217;s reference price was 8000<br>\u2981 PC&#8217;s reference price was 15000<br>So I set:<br>\u2981 C&#8217;s fair price = (midPrc_C + midPrc_PC * 8\/15)\/2<br>\u2981 PC&#8217;s fair price = (midPrc_C * 15\/8 + midPrc_PC)\/2<\/p>\n<p>As a taking strategy, I determined target positions based on existing edge (fair_price &#8211; mid_price). For example:<\/p>\n<p>\u2981 If I wanted 100% position when C&#8217;s edge = 20<\/p>\n<p>\u2981 Then PC would need -100% position at edge = -20*15\/8<br>So if C&#8217;s edge was 10 with current positions at 40% (C) and -35% (PC), I would buy 10% C while selling -15% PC, potentially splitting the 10% into multiple transactions.<\/p>\n<p>For execution, I adapted Strategy V3&#8217;s approach with additional dynamic constraints:<\/p>\n<p>\u2981 Added maximum trade size limits to prevent exceeding target positions<\/p>\n<p>\u2981 Used aggressive taking orders when edge &gt; x<\/p>\n<p>\u2981 Used passive orders to capture best bid\/ask when edge &lt; x<br>This became Strategy V4.<\/p>\n<p><b>Final results:<\/b><\/p>\n<p>\u2981 New products (pair trading): ~4k profit<\/p>\n<p>\u2981 Original products (market making): maintained ~3k profit<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>The first round results were decent. In Round 2, two new products were introduced &#8211; let&#8217;s call them C and PC. Looking at their price movements, they showed high correlation, which was confirmed by calculating their price change correlation. This strongly suggested pair trading potential. I analyzed historical trading data to estimate theoretical market making [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":4537,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31],"tags":[],"class_list":["post-4602","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-2023r2"],"acf":[],"_links":{"self":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4602","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/comments?post=4602"}],"version-history":[{"count":13,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4602\/revisions"}],"predecessor-version":[{"id":4619,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4602\/revisions\/4619"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/media\/4537"}],"wp:attachment":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/media?parent=4602"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/categories?post=4602"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/tags?post=4602"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}