Axiomatic Market Making

Abstract

This paper axiomatizes the bid-ask market maker's quoting rule. A quoting rule maps the maker's state, namely inventory, belief, variance, trade intensity, and informed-trader fraction, to a bid-ask pair. Eight natural axioms, together with six environmental assumptions on the maker's inventory cost, force a unique three-parameter family: the mid-quote is linear in inventory, and the spread decomposes additively into inventory and adverse-selection components. Each of the three parameters is identified from a distinct moment of the observable quoting rule, with the three identifications mutually decoupled. The eight axioms partition into a four-axiom indispensable core, one structural choice, and three modularity extensions. Two structural corollaries follow: the latent inventory cost function is recoverable from the limit order book, and a sharp phase transition separates a functioning regime from a frozen one. A closing meta-theorem identifies four features invariant across all admissible structural primitives within the axiom system. To our knowledge, this is the first forced-uniqueness axiomatization of the quoting rule.