FX Market Making with Internal Liquidity

ArXiv ID: 2512.04603 “View on arXiv”

Authors: Alexander Barzykin, Robert Boyce, Eyal Neuman

Abstract

As the FX markets continue to evolve, many institutions have started offering passive access to their internal liquidity pools. Market makers act as principal and have the opportunity to fill those orders as part of their risk management, or they may choose to adjust pricing to their external OTC franchise to facilitate the matching flow. It is, a priori, unclear how the strategies managing internal liquidity should depend on market condions, the market maker’s risk appetite, and the placement algorithms deployed by participating clients. The market maker’s actions in the presence of passive orders are relevant not only for their own objectives, but also for those liquidity providers who have certain expectations of the execution speed. In this work, we investigate the optimal multi-objective strategy of a market maker with an option to take liquidity on an internal exchange, and draw important qualitative insights for real-world trading.

Keywords: market making, liquidity pools, principal trading, risk management, multi-objective optimization, FX (Foreign Exchange)

Complexity vs Empirical Score

  • Math Complexity: 9.0/10
  • Empirical Rigor: 4.0/10
  • Quadrant: Lab Rats
  • Why: The paper presents a complex stochastic control problem with a Hamilton–Jacobi–Bellman quasi-variational inequality (HJBQVI) requiring numerical solution, indicating high mathematical density. However, the work is purely theoretical with no backtests, code, or real-world data implementation details, placing it firmly in the theoretical ‘Lab Rats’ category.
  flowchart TD
    A["Research Goal:<br>Optimal MM Strategy for Internal Liquidity"]
    B["Key Inputs:<br>Market Conditions, Risk Appetite,<br>Client Algo Parameters"]
    C["Methodology:<br>Multi-Objective Optimization Model"]
    D["Process:<br>Simulation & Numerical Analysis"]
    E["Outcome 1:<br>Dynamic Pricing Thresholds"]
    F["Outcome 2:<br>Optimal Inventory Management"]
    
    A --> B
    B --> C
    C --> D
    D --> E
    D --> F