Do any try trading a "market maker" approach?

[Saltynuts]

I remember reading in books when I was a kid stories where the NYSE at least I believe had people that served as "market makers". Their job was to kinda-sorta to keep the market orderly by making sure there was a bid and an ask. So they would maintain a portfolio of the particular stocks they were working on. When people were buying, they were selling, and vice versa. I remember reading that they were almost always very profitable.

So has anyone ever dabbled with serving as a mini-market maker in a way? I was thinking maybe you had a few stocks, or better yet, extremely low-cost ETFs or ETNs that you generally held long portfolios in. You also held a bundle of other stocks, or better yet, super expensive (annual fees) closed end funds that you generally maintained short positions on. The two bundles would generally be correlated asset wise - i.e. they might be large cap U.S. equities. Maybe you would be try and have a bigger long position over time since the markets generally go up. But both your positions would grow and shrink over time, long positions growing as the market fell, shrinking when it rose, and vice versa on the short positions. You would try and catch the delta on the low fee long versus high fee short as well. Plus you would be making trades just catching the volatility "noise".

Anybody ever do this or read or think about it? Thoughts? I remember someone posting on here a couple of the winners in a long-term trading contest, and one of the guys high up there it said did "market maker" techniques, but I have no idea what that means.

Thanks for any thoughts!

 

[CyJackX]

Trading fees will eat you alive.

 

[ElectricSavant]

To be both sides requires two accounts...

 

[Saltynuts]

Trading fees will eat you alive.

I dunno, IBs fees seem to be pretty darned cheap. Let's say I put $5,000 to buy every 5% drop, and sell $5000 worth after that every 5% rise. So make $250 per trade. I would guess IBs fees would be a small fraction of that.

 

[Saltynuts]

To be both sides requires two accounts...

I don't think I'm on both sides ElectricSavant, not of the same stock/index anyways. I would be LONG, let's say some very low fee passively managed index funds, and SHORT some unrelated, high fees actively traded closed end funds. I would have buy orders and sell orders on each one, but I would be long one, short the other.

I figure if you have a fund that charges 2%+ fees annually, and that is actively traded (generally underperform), you would probably earn 3%+ on the spread between your long and shorts annually, with low overall market exposure, plus what you earn on what you might call the super-charged dollar cost averaging.

 

[ElectricSavant]

Well said..cross dressing maybe a better explanation

I don't think I'm on both sides ElectricSavant, not of the same stock/index anyways. I would be LONG, let's say some very low fee passively managed index funds, and SHORT some unrelated, high fees actively traded closed end funds. I would have buy orders and sell orders on each one, but I would be long one, short the other.

I figure if you have a fund that charges 2%+ fees annually, and that is actively traded (generally underperform), you would probably earn 3%+ on the spread between your long and shorts annually, with low overall market exposure, plus what you earn on what you might call the super-charged dollar cost averaging.

 

[Error Correction Funder]

Considering how bad regulation is, market making algorithms probably get closer to the exchanges than what's provided for retail.

They seem to be largely efficient to me. They all tend to pounce at similar times when I traded illiquid options. It wouldn't surprise me if those algorithms are kept as legacy processing just in case market demand is outstripping trader supplies for liquid securities or even discarded since the computational burden may exceed the expected revenue.

Unless you have an edge, this service is pretty well locked up.

 

[Sig]

I remember reading in books when I was a kid stories where the NYSE at least I believe had people that served as "market makers". Their job was to kinda-sorta to keep the market orderly by making sure there was a bid and an ask. So they would maintain a portfolio of the particular stocks they were working on. When people were buying, they were selling, and vice versa. I remember reading that they were almost always very profitable.

So has anyone ever dabbled with serving as a mini-market maker in a way? I was thinking maybe you had a few stocks, or better yet, extremely low-cost ETFs or ETNs that you generally held long portfolios in. You also held a bundle of other stocks, or better yet, super expensive (annual fees) closed end funds that you generally maintained short positions on. The two bundles would generally be correlated asset wise - i.e. they might be large cap U.S. equities. Maybe you would be try and have a bigger long position over time since the markets generally go up. But both your positions would grow and shrink over time, long positions growing as the market fell, shrinking when it rose, and vice versa on the short positions. You would try and catch the delta on the low fee long versus high fee short as well. Plus you would be making trades just catching the volatility "noise".

Anybody ever do this or read or think about it? Thoughts? I remember someone posting on here a couple of the winners in a long-term trading contest, and one of the guys high up there it said did "market maker" techniques, but I have no idea what that means.

Thanks for any thoughts!

You suffer from a pretty viscious adverse selection effect when you're a market maker. There's a good deal of academic research published on the effects, most if not all of which has been incorporated into the algorithms that now do market making. Not to say it's not worth looking at, especially for some less liquid instruments, but do yourself a favor and spend a Sunday night with Google Scholar on the subject first.

 

[yobo]

I remember reading in books when I was a kid stories where the NYSE at least I believe had people that served as "market makers". Their job was to kinda-sorta to keep the market orderly by making sure there was a bid and an ask. So they would maintain a portfolio of the particular stocks they were working on. When people were buying, they were selling, and vice versa. I remember reading that they were almost always very profitable.

So has anyone ever dabbled with serving as a mini-market maker in a way? I was thinking maybe you had a few stocks, or better yet, extremely low-cost ETFs or ETNs that you generally held long portfolios in. You also held a bundle of other stocks, or better yet, super expensive (annual fees) closed end funds that you generally maintained short positions on. The two bundles would generally be correlated asset wise - i.e. they might be large cap U.S. equities. Maybe you would be try and have a bigger long position over time since the markets generally go up. But both your positions would grow and shrink over time, long positions growing as the market fell, shrinking when it rose, and vice versa on the short positions. You would try and catch the delta on the low fee long versus high fee short as well. Plus you would be making trades just catching the volatility "noise".

Anybody ever do this or read or think about it? Thoughts? I remember someone posting on here a couple of the winners in a long-term trading contest, and one of the guys high up there it said did "market maker" techniques, but I have no idea what that means.

Thanks for any thoughts!

Yes, it’s called pair trading or some say statistical arbitration or market neutral strategies. The idea is to watch the spread between two correlated assets such coke and Pepsi. Long one and short the other and hope you have it right as the spread reverses back to the mean. Another example might be long small cap growth and short small cap value.

I can’t imagine ever using a CEF as part of a pair. Why would you do that?

 

[eves_banished_children]

You mean like the make money slowly approach ?

I've wondered about stocks with very low liquidity that have no bid/ask, what happens if someone who has all month and doesn't care just put a lowball bid out and waited around to see if someone hit it since it's the only bid, then turned right around and good till cancel an ask that turns a profit after commission. I guess partial fills would be a problem.