What Risks Does a Market Maker Face When Their Win Rate Is Too High?
A market maker with a consistently high win rate likely has quotes that are too aggressive (too tight a spread), which means they are not being adequately compensated for the risk they are taking. The primary risk is "adverse selection," where they are frequently trading against informed counterparties who know the market is about to move.
This leads to taking on poorly priced inventory and a lower profit per trade, potentially resulting in overall negative profitability despite high volume.
Glossar
Poorly Priced Inventory
Valuation ⎊ Poorly priced inventory refers to an accumulated position of an asset or derivative that was acquired at a price significantly different from its true fair market value, often due to a flawed quoting model or adverse selection.
Market Maker
Agency ⎊ A market maker in cryptocurrency derivatives functions as a principal, providing liquidity by simultaneously posting bid and ask prices for contracts, notably perpetual swaps and options.
Informed Counterparties
Identification ⎊ Informed Counterparties are trading partners, often institutional or professional market makers, who possess superior, timely, or more comprehensive data regarding market conditions, asset valuation, or upcoming large order flows.