difference between market-making and just proprietary trading?

Quote from MTE:

Bad deal is not the same as a bad quote. WD40 can correct me to what he/she actually meant, but I'm pretty sure the meaning is that although the market maker maybe bullish on a stock he/she still has to buy a put. (Yes, I know that market makers don't really care about the direction, so please save your comments on this example. It was just an example to demonstrate a point.)
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There is a lot of misinformation on this thread. There is a huge difference between a MM honoring a market HE MADE, and forcing him to take a trade. No MM is forced to take a trade.

Example: Stock XYZ, the April 50 calls are 1.30 bid at 1.40 offer. My market might be 1.20 bid at 1.50 offer. I am not forced to buy anything at 1.30 or sell anything at 1.40. If the 1.30 bid is taken out and I do not update my market and I'm the next bid at 1.20, I will be forced to trade the minimum, usually a 10 lot, at that price.

Since most option markets are auto-quoted now, if the 1.30 bid goes, my software will move me down to 1.10 bid now and will keep dropping my bid if I choose to stay off the market. No one is forcing me to do anything. MM's are only required to honor the markets THEY make, not what other people make.
 
Quote from freehouse:

Not true. If the price is really off the market makers will cry to the floor officials to "bust" the trade because of some lame excuse (bad quote, technology problem, fast market, the dog ate my homework, etc.).
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This rarely happens. These markets are being auto-quoted by bots now. If the underlying price makes a large move, most MM's software will pull them off the market. This is done very quickly and efficiently. For example, in the auto-quoting software we use, we have a feature that will pull all our quotes if the underlying moves a certain amount quickly, say .20. This keeps us from being picked off in case there is a sudden gap in the stock.
 
Quote from custom85:

I know Im new here, and no one will probably listen. But most people on this site have no clue how options trade, why they are used, and much less how to trade them. Maverick here seems to have a grasp of how it works. For those of you who dont want to listen to a new guy I was a market-makert at the CBOE so I truly do know how things trade. Options are a complex and expensive instrument to learn to trade properly.
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are they?
didn't know that...thanks for the priceless insight, was waiting for decades to come across such an informative post.
thanks again
 
Don't know about the US, but on Eurex MMs also pay the exchange, but at a significant discount if the market-making requirement is met. The requirement is that a certain percentage of quotes must be responded to. There is no obligation to trade someone's bid or offer, but if they hit yours... then you obviously have to take it because you're filled.
 
Quote from Verdais:

Don't know about the US, but on Eurex MMs also pay the exchange, but at a significant discount if the market-making requirement is met. The requirement is that a certain percentage of quotes must be responded to. There is no obligation to trade someone's bid or offer, but if they hit yours... then you obviously have to take it because you're filled.
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Yes, same here. MM's are required to post a market a certain percentage of the time. But my posted market could be very wide. In fact, the exchanges in this country only require you to be within $5 of the current market. Example:

The Dec 50 calls are 6.50 bid at 6.70 offer. The widest market I am allowed to make is 4.00 bid at 9.00 offer. Obviously I will never get hit on these prices. The reason I would set the market this wide is because I have no interest in trading anything at this strike or this month, or maybe even the stock. So I post a market. Yet, I need not to worry about getting filled at these prices.
 
Quote from Maverick74:

There is a lot of misinformation on this thread. There is a huge difference between a MM honoring a market HE MADE, and forcing him to take a trade. No MM is forced to take a trade.

Example: Stock XYZ, the April 50 calls are 1.30 bid at 1.40 offer. My market might be 1.20 bid at 1.50 offer. I am not forced to buy anything at 1.30 or sell anything at 1.40. If the 1.30 bid is taken out and I do not update my market and I'm the next bid at 1.20, I will be forced to trade the minimum, usually a 10 lot, at that price.

Since most option markets are auto-quoted now, if the 1.30 bid goes, my software will move me down to 1.10 bid now and will keep dropping my bid if I choose to stay off the market. No one is forcing me to do anything. MM's are only required to honor the markets THEY make, not what other people make.
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That's what I meant. I should had been more clear.
Thanks Maverick!
 
Not sure whether the original question was after such an answer, but I'll dip my toe in anyway.

On a different note, I would say the key difference between a price-maker (market maker (MM)) and price-taker (prop trader(PT)) is that the MM has order flow and benefits from the bid ask spread - a natural edge, whereas a PT has no 'natural edge'.

Furthermore a MM would seek to lay off risk, whereas a PT seeks to take on (attractive) risk.
 
If a retail trader has direct market access, does a MM really have any significant advantage over the retail trader ?

Ok, a retail trader has to pay broker comms, but a MM has overheads such as office rent, staff costs etc, etc.

Where exactly is the MM's edge ?
 
Quote from Profitaker:

If a retail trader has direct market access, does a MM really have any significant advantage over the retail trader ?

Ok, a retail trader has to pay broker comms, but a MM has overheads such as office rent, staff costs etc, etc.

Where exactly is the MM's edge ?
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Buying on the bid, selling on the ask, quoting a two-sided market.
 
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