New Research Unveils Optimal Market-Making Framework for High-Yield Perpetual Futures

A new paper on arXiv (2607.11888) introduces a rigorous mathematical framework for market making in perpetual futures markets, specifically targeting venues that charge zero maker fees. The research models the market maker's decision as a stochastic optimal control problem, where adaptive bid-ask spreads and inventory hedging across two exchanges are the key levers. The authors derive a profit-and-loss decomposition theorem that separates revenue into spread income, adverse selection loss, inventory carrying cost, hedging friction, and funding rate exposure, giving practitioners a clear view of where returns come from and where they leak.

Central to the work is the High-APY Regime Theorem, which maps out profitable regions using five dimensionless parameters and culminates in a Master APY Formula. This allows market makers to quantify expected returns under different market conditions. The paper also analyzes zero-fee economics on decentralized perpetual exchanges, providing optimal entry and exit thresholds, and examines cross-exchange hedging policies that account for funding rate dynamics—a critical factor in perpetual futures that can eat into profits.

Another key contribution is the robustness margin, which quantifies how much parameter uncertainty a strategy can tolerate before becoming unprofitable. The authors also present exponential drawdown probability bounds and a universal APY-VaR identity, linking expected returns to risk metrics. For those managing leverage, the paper includes Kelly-optimal leverage calculations with explicit ruin boundaries, helping traders avoid catastrophic losses. Finally, multi-pair portfolio allocation is addressed with diversification saturation results, showing when adding more assets no longer improves risk-adjusted returns.

The framework is said to unify and extend established models from Avellaneda-Stoikov, Gueant-Lehalle-Fernandez-Tapia, and Glosten-Milgrom, adapting them to modern decentralized venue microstructure. Numerical analysis with 23 figures reveals phase transitions between profitable and unprofitable regimes, giving practitioners a visual guide to strategy viability. While the paper is theoretical, its practical implications for algorithmic trading firms, DeFi liquidity providers, and hedge funds are significant, especially as zero-fee perpetual exchanges gain traction.