Perpetual Market Making

Market making strategy for perpetual futures contracts with leverage

Overview

Perpetual Market Making applies market making strategies to perpetual futures markets, allowing traders to use leverage while providing liquidity. This strategy extends pure market making concepts to derivatives markets with position management and profit-taking features.

How It Works

1. Place Leveraged Orders: Creates bid and ask orders on perpetual markets
2. Monitor Positions: Tracks long and short positions separately
3. Profit Taking: Automatically places opposite orders to reduce positions
4. Stop Loss: Protects against adverse price movements
5. Refresh Orders: Updates orders based on market conditions

# Position-aware order placement
if position_mode == "One-way":
    net_position = long_position - short_position
    adjust_orders_for_position(net_position)
else:  # Hedge mode
    manage_long_and_short_separately()

When to Use

Best For

• Perpetual futures markets with funding rates
• Leveraged liquidity provision
• Traders comfortable with derivatives
• Markets with position-based incentives

Avoid When

• Unfamiliar with leverage mechanics
• Exchange has high funding rates
• Extremely volatile markets
• Insufficient collateral for liquidation risk

Core Configuration Parameters

Derivative Setup

derivative · string · required

The derivative exchange connector

Examples: binance_perpetual, bybit_perpetual, dydx_perpetual

market · string · required

Perpetual trading pair in BASE-QUOTE format

Example: BTC-USDT (for BTC-USDT perpetual contract)

leverage · int · required

Leverage multiplier for positions

Example: 10 for 10x leverage

Range: Varies by exchange (Binance supports up to 75x for most pairs)

Higher leverage increases liquidation risk. Start with 2-5x leverage.

position_mode · string · default: "One-way"

Position management mode

Options:

• One-way: Net position (long and short offset each other)
• Hedge: Separate long and short positions

Hedge mode allows simultaneous long and short positions, useful for complex strategies.

Spread Configuration

bid_spread · decimal · required

Distance from mid-price for bid orders. Enter 1 for 1%.

Example: 0.1 places bids 0.1% below mid-price

ask_spread · decimal · required

Distance from mid-price for ask orders. Enter 1 for 1%.

Example: 0.1 places asks 0.1% above mid-price

minimum_spread · decimal · default: "-100"

Minimum spread before automatically canceling orders. Enter 1 for 1%.

Range: -100% to 100%

Example: 0.05 cancels orders if spread drops below 0.05%

Order Management

order_amount · decimal · required

Order size in base asset (contracts)

Example: 0.01 for 0.01 BTC worth of contracts

With leverage, actual exposure = order_amount * leverage

order_refresh_time · float · required

Frequency in seconds to refresh orders

Example: 30.0 refreshes every 30 seconds

order_refresh_tolerance_pct · decimal · default: "0"

Minimum price change to trigger refresh. Enter 1 for 1%.

Range: -10% to 10%

Multi-Level Orders

order_levels · int · default: "1"

Number of orders per side

Example: 3 creates 3 buy and 3 sell orders

order_level_spread · decimal · default: "1.0"

Spread increment between levels. Enter 1 for 1%.

Required if order_levels > 1

order_level_amount · decimal · default: "0"

Amount increase/decrease per level

Example: 0.005 increases each level by 0.005 BTC

Profit Taking

long_profit_taking_spread · decimal · default: "0"

Spread from long position entry price to place profit-taking sell orders. Enter 1 for 1%.

Example: 2.0 places sell order 2% above long entry price

Range: 0% to 100%

short_profit_taking_spread · decimal · default: "0"

Spread from short position entry price to place profit-taking buy orders. Enter 1 for 1%.

Example: 2.0 places buy order 2% below short entry price

Range: 0% to 100%

Stop Loss

stop_loss_spread · decimal · default: "0"

Spread from entry price to place stop loss orders. Enter 1 for 1%.

Example: 5.0 places stop loss 5% away from entry

Range: 0% to 101%

Stop loss triggers market orders in the opposite direction to close positions.

time_between_stop_loss_orders · float · default: "60"

Seconds before refreshing unfilled stop loss orders

Example: 120 refreshes stop loss every 2 minutes if not executed

stop_loss_slippage_buffer · decimal · default: "0.5"

Additional slippage buffer for stop loss orders. Enter 1 for 1%.

Ensures stop loss orders execute even in volatile conditions.

Price Sources

price_source · string · default: "current_market"

Price reference for order placement

Options:

• current_market: Use current derivative mid-price
• external_market: Use another exchange’s price
• custom_api: Use custom API endpoint

price_type · string · default: "mid_price"

Type of price to use

Options:

• mid_price: Average of best bid and ask
• last_price: Last traded price
• last_own_trade_price: Your last trade price
• best_bid: Top bid price
• best_ask: Top ask price

price_source_derivative · string

External exchange/derivative for price reference

Required when price_source=external_market

price_source_market · string

Trading pair on external source

Advanced Features

price_ceiling · decimal · default: "-1"

Price above which only sell orders are placed. Use -1 to disable.

price_floor · decimal · default: "-1"

Price below which only buy orders are placed. Use -1 to disable.

order_optimization_enabled · bool · default: "false"

Enable best bid/ask jumping (order book top positioning)

filled_order_delay · float · default: "60"

Delay in seconds after order fill before placing new orders

Example Configurations

Conservative Market Making

strategy: perpetual_market_making
derivative: binance_perpetual
market: ETH-USDT
leverage: 3
position_mode: One-way
bid_spread: 0.1
ask_spread: 0.1
order_amount: 0.1
order_refresh_time: 30.0
long_profit_taking_spread: 1.0
short_profit_taking_spread: 1.0
stop_loss_spread: 3.0
stop_loss_slippage_buffer: 0.5

Features:

• Moderate 3x leverage
• Conservative spreads (0.1%)
• Profit taking at 1%
• Stop loss at 3%
• One-way position mode

Aggressive Multi-Level

strategy: perpetual_market_making
derivative: bybit_perpetual
market: BTC-USDT
leverage: 10
position_mode: Hedge
bid_spread: 0.05
ask_spread: 0.05
order_amount: 0.01
order_levels: 5
order_level_spread: 0.05
order_level_amount: 0.005
order_refresh_time: 15.0
long_profit_taking_spread: 0.5
short_profit_taking_spread: 0.5
stop_loss_spread: 2.0
order_optimization_enabled: true

Optimized for:

• High 10x leverage
• Tight spreads (0.05%)
• 5 order levels
• Hedge mode for complex positions
• Quick profit taking (0.5%)
• Order optimization enabled

Price Source from Spot

strategy: perpetual_market_making
derivative: binance_perpetual
market: SOL-USDT
leverage: 5
position_mode: One-way
bid_spread: 0.2
ask_spread: 0.2
order_amount: 10
order_refresh_time: 20.0
price_source: external_market
price_type: mid_price
price_source_derivative: binance
price_source_market: SOL-USDT
long_profit_taking_spread: 1.5
short_profit_taking_spread: 1.5
stop_loss_spread: 4.0

Uses spot market price to detect funding arbitrage opportunities.

Position Management

One-Way Mode

# Net position calculation
net_position = long_contracts - short_contracts

if net_position > 0:
    # Net long position
    place_profit_taking_sell_orders()
elif net_position < 0:
    # Net short position
    place_profit_taking_buy_orders()

Benefits:

• Simpler position tracking
• Natural hedging of long/short
• Lower margin requirements

Hedge Mode

# Separate position tracking
if long_position > 0:
    place_long_profit_taking_orders()
    place_long_stop_loss()

if short_position > 0:
    place_short_profit_taking_orders()
    place_short_stop_loss()

Benefits:

• Simultaneous long and short
• Independent position management
• Advanced arbitrage strategies

Leverage and Risk

Liquidation Price Calculation

# Approximate liquidation calculation
entry_price = 50000  # USD
leverage = 10
margin_ratio = 0.01  # 1% maintenance margin

# Long position
liquidation_long = entry_price * (1 - 1/leverage + margin_ratio)
# = 50000 * (1 - 0.1 + 0.01) = 45500 USD

# Short position
liquidation_short = entry_price * (1 + 1/leverage - margin_ratio)
# = 50000 * (1 + 0.1 - 0.01) = 54500 USD

Recommended Leverage by Experience

Experience Level	Recommended Leverage	Risk Level
Beginner	2-3x	Low
Intermediate	3-5x	Medium
Advanced	5-10x	High
Expert	10-20x	Very High

Never use maximum available leverage. Maintain buffer for market volatility.

Funding Rate Considerations

Perpetual contracts charge/pay funding rates every 8 hours. Consider funding rates when market making:

• Positive Funding: Longs pay shorts (favor short positions)
• Negative Funding: Shorts pay longs (favor long positions)

Checking Funding Rates

# In Hummingbot
status --funding_rate

Adjust inventory target based on funding:

# High positive funding (longs pay shorts)
long_profit_taking_spread: 0.5   # Take long profits quickly
short_profit_taking_spread: 2.0  # Hold short positions longer

# High negative funding (shorts pay longs)
long_profit_taking_spread: 2.0   # Hold long positions
short_profit_taking_spread: 0.5  # Take short profits quickly

Tips for Success

Start with Low Leverage

Begin with 2-3x leverage regardless of exchange limits. Increase gradually as you gain experience:

leverage: 3  # Start here
# After 1 month profitable → 5
# After 3 months profitable → 7-10

Always Use Stop Loss

Set stop loss at 2-5x your normal spread to prevent catastrophic losses:

bid_spread: 0.1
ask_spread: 0.1
stop_loss_spread: 3.0  # 30x the spread

Monitor Margin Ratio

Keep margin ratio above 20% to avoid liquidation:

# Check margin in Hummingbot
balance --derivative binance_perpetual

If margin < 30%, reduce position size or add collateral.

Account for Funding Costs

Calculate break-even including funding:

daily_funding_cost = position_size * funding_rate * 3
min_daily_profit_target = daily_funding_cost * 1.5

Risk Management

Critical Risks:

• Liquidation Risk: Leverage amplifies losses; positions can be liquidated
• Funding Risk: Negative funding rates reduce profitability
• Volatility Risk: Sudden moves can trigger stop losses
• Exchange Risk: Derivatives exchanges may have outages during volatility

Risk Mitigation Checklist

• Set stop_loss_spread on all strategies
• Use leverage ≤ 5x for most markets
• Maintain margin ratio > 30%
• Monitor funding rates 3x daily
• Set price_ceiling and price_floor for range-bound trading
• Enable order_optimization during high volatility
• Keep 50% capital in reserve for margin calls

Performance Optimization

Order Placement Strategy

Tight Spreads (Competitive)

bid_spread: 0.02
ask_spread: 0.02
order_levels: 3
order_optimization_enabled: true
filled_order_delay: 5

Best for: High liquidity markets, competitive market making

Wide Spreads (Safe)

bid_spread: 0.3
ask_spread: 0.3
order_levels: 5
order_level_spread: 0.1
filled_order_delay: 60

Best for: Volatile markets, risk-averse traders

Balanced

bid_spread: 0.1
ask_spread: 0.1
order_levels: 3
order_level_spread: 0.08
order_optimization_enabled: false
filled_order_delay: 30

Best for: Most perpetual markets

Comparison with Spot Market Making

Feature	Perpetual MM	Spot MM
Leverage	Yes (2-100x)	No
Funding Costs	Yes (every 8h)	No
Profit Taking	Built-in	Manual
Stop Loss	Built-in	External
Position Modes	One-way/Hedge	N/A
Liquidation Risk	Yes	No
Capital Efficiency	High	Lower

Source Code Reference

Configuration: /source/hummingbot/strategy/perpetual_market_making/perpetual_market_making_config_map.py:106

Strategy Implementation: /source/hummingbot/strategy/perpetual_market_making/perpetual_market_making.py

Order Tracker: /source/hummingbot/strategy/perpetual_market_making/perpetual_market_making_order_tracker.py

Related Strategies

• Pure Market Making: Spot market equivalent
• Spot Perpetual Arbitrage: Arbitrage between spot and perpetual