You show 1,000 lots bid at 25.00 and 1,000 offered at 25.04 in a name whose average print is 50 lots. Your whole bid is filled in a single print. What is your revised estimate of fair value and what do you do with the offer?

You show 1,000 lots bid at 25.00 and 1,000 offered at 25.04 in a name whose average print is 50 lots. Your whole bid is filled in a single print. What is your revised estimate of fair value and what do you do with the offer?

Approach: Ask what kind of counterparty takes a hundred times the average print in one go, then decide what that implies for fair value and for the quote you still have live on the other side.

Fair value is now below 25.00, so pull the offer and reprice both sides down. The size inference does the work: a counterparty that takes 1,000 lots in one print in a market trading 50 at a time is either informed or hedging a position it has already put on, and in both cases the next prints are more likely to be lower. Leaving the 25.04 offer live means selling more into a market that has just been shown to be heavy while you are already long 1,000 lots. Order flow toxicity of that kind shows up as several ticks of adverse markout within seconds. The reasonable response is to quote 24.94 bid at 24.98 offer, work out of part of the position, and keep the next quote smaller until the flow that hit you has finished.

Follow-up: The print turns out to have been a delta hedge against an options trade. How would you have told that apart in real time, and would the answer change?

Key concepts: order flow toxicity, size inference, quote revision, adverse markout.