How Do Market Makers Adjust Their Quote Size Based on Observed Fill Rates?

If a market maker observes a high fill rate, they might increase their quote size to capture more volume, signaling confidence in their pricing model. Conversely, a very low fill rate might prompt them to reduce size to limit potential losses from mispricing, or to signal a temporary reduction in liquidity provision while they recalibrate their model.

Size adjustment is a dynamic risk and capacity management tool.