I don't really understand your point here. Any market maker buys when people sell: that's pretty much the definition.
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So you're buying as price drops, and you know it's possible (likely, even) it keeps dropping and you'll take a loss (at least temporarily!).
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So yeah, if price only ever moved in one direction, market makers would be screwed. That's true of all MMs, A or not...
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We're probably talking past each other. What specific claim did you mean was false when you said "*this* is missing the key part of IL"?
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So:
1) MMs don't usually have the strategy of "bid and offer, never cancel, always replace", that would generally not go well
2) MMs basically always update their markets when prices move on other venues.
You (and the OP) are forgetting about other exchanges.
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When another exchange's price drops, generally MMs on the first exchange would decrease their bids.
But AMMs don't, they just sit there waiting for someone to sell to them at the pre-drop-price.
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Yes, AMMs are dumb that way. Otoh, as discussed the sliding price means an AMM doesn't just "buy at the pre-drop price" - that's misleading.
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True, an AMM never sees external trades(/news events) & drops its bid. But it also never gets caught with a big sitting bid getting filled.
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generally when there's a big sitting bid getting filled, though, that was an intentional decision by someone to buy a lot at that level
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Well maybe you've dodged this but many MMs have had the experience of buying more at the start of a drop than in retrospect they wanted (✋)
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