How do market makers make money?

[sle]

check revenues of susq vs virtu. either way it's all software now

It's becoming a winner take-all game, as virtu does OMM now too and is rapidly gaining market share.

Short-term OMM now works within a paradigm that's very similar to stock MM (e.g. most of the OMM money is now made on delta, not spreading vol).

 

[Robert Morse]

Your worst fear is negative selection so you end up doing two things - skewing your markets based on various alpha signals and having an adversity model that would cause you to pull these orders. That could be either based on the information specific to this particular stock or based on the broad market. For example, as an MM you probably have an MW feed from up north and can react quickly to moves in ES, but it's not likely you trade the ES unless really forced to.

I agree. I also expect that most Equity market makers are involved in creations/redemption of the enormous number of ETFs out there so it is possible to move blocks of baskets into a hedged trade and move on.

 

[Vuu]

Who says they don't lose money. They cover their loses by charging you as a retail trader and also betting against you. Stay away from market makers if you don't understand the game. I have been using Forexchief broker for a while, I understand that kind of broker and how they make their money. Trade and pay the commission - simple

 

[wildchild]

Flash crashes have shown us just how few limit orders there are without market makers outside a narrow band.

So during the flash crash, would any market maker on that security take it on the chin? I assume there would be high likelihood of them posting big loses during these episodes.

 

[ironchef]

It's becoming a winner take-all game, as virtu does OMM now too and is rapidly gaining market share.

Short-term OMM now works within a paradigm that's very similar to stock MM (e.g. most of the OMM money is now made on delta, not spreading vol).

I agree. I also expect that most Equity market makers are involved in creations/redemption of the enormous number of ETFs out there so it is possible to move blocks of baskets into a hedged trade and move on.

Question:

I thought OMM delta hedge?

 

[destriero]

MM’s only have to be the buyer of last resort. They let it crash and others take the hit UNTIL they see buying pressure come in. Sometimes they get caught with their pants down and lose big time. But most of the time their pants stay up. Ours drop in crashes. There are institutions that buy and buy and buy as the market slides. They are bullish ..have large orders to fill..and just figure they are getting in at better prices. Most won’t be that interested in pump and dump penny stocks..but they may do or be involved in some pumping and dumping of their own with a profit in view of course.LOL

lol buyers of last resort. Your post is completely devoid of useful info and almost entirely wrong. WTF are you here?

 

[qlai]

So during the flash crash, would any market maker on that security take it on the chin?

I doubt it. It's their business not to be hurt by such events and they have the technology advantage to get out in time. The only people who got it on the chin are regular investors who were robbed out of their shares in a blink of an eye. It's absolutely ridiculous to me that MM are allowed to be able to print money in normal times yet allowed to step aside during extreme times. Hopefully, the limit up/down circuit breakers will protect the public, but may actually make it much worse.

 

[wildchild]

I doubt it. It's their business not to be hurt by such events and they have the technology advantage to get out in time. The only people who got it on the chin are regular investors who were robbed out of their shares in a blink of an eye. It's absolutely ridiculous to me that MM are allowed to be able to print money in normal times yet allowed to step aside during extreme times. Hopefully, the limit up/down circuit breakers will protect the public, but may actually make it much worse.

Are you now or have you ever been a MM? I heard Robert Morse was and was hoping he could chime in. It would be interesting to know.

 

[qlai]

Are you now or have you ever been a MM? I heard Robert Morse was and was hoping he could chime in. It would be interesting to know.

Me answering the question, does not preclude Robert or anyone else from answering your questions.

 

[sle]

It's absolutely ridiculous to me that MM are allowed to be able to print money in normal times yet allowed to step aside during extreme times.

That's because equity HFTs are not market makers in the old sense of that word. Anyone with the right technology can play this game, there is no regulatory obligation of "ensuring fair and orderly market" like in the old times. For example, I make markets in several securities where I have the analytical advantage without being registered as an MM. In options, it's a bit different, as you have to be a broker-dealer and have some compliance burden in exchange for some special arrangements.

Also, in reality, things like flash crashes are so rare that they don't really take catastrophic losses. What really hurts is a breakdown in their models like it happened with Knight. When you're making millions of trades a day, tiny advantage translates to a large profit while tiny disadvantage translates to a very large loss. Both happen way before you know it.