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Quantitative Finance · Glossary

What is Defensive widening?

Definition 6.2 Market Making and High-Frequency Trading · Chapter 6 — Adverse Selection and Toxicity

Defensive widening moves a quote away from the fair price on the side, or both sides, where adverse selection is expected, keeping it in the book at a price that compensates for the expected mark-out; in a one-tick book it means stepping back a tick from the best price.

The two responses a one-lot market maker has in a one-tick book when its bid is scored toxic (the book: bid queues in blue, ask queues in red, prices in ticks; our lot as a thick bar on top of a queue). Base: our lot rests at the best bid, 100, and at the best ask, 101. Fade: the bid is withdrawn. Widen: the bid steps back to 99, where it is almost never filled.
Figure 6.3. The two responses a one-lot market maker has in a one-tick book when its bid is scored toxic (the book: bid queues in blue, ask queues in red, prices in ticks; our lot as a thick bar on top of a queue). Base: our lot rests at the best bid, 100, and at the best ask, 101. Fade: the bid is withdrawn. Widen: the bid steps back to 99, where it is almost never filled.
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