Is Market Making Dead?
- Thread starter Canuck709
- Start date
CVDS16, SURDO
Firms that make markets in options killed it in 2008. One of my relatives deals in this business in London. I desperately tried to see if I could get a position with them, but without computer programming skills or a background in quantitative finance I was bluntly viewed worthless to them. The head guy also only hires individuals with a MBA. I guess there are just higher standards in Europe.
He recommended that I try the Chicago area market makers firms because they also did very well. Unfortunately I've had no luck there either... I have a bachelors from a good liberal arts college, but essentially no computer programming skills. I haven't taken any advanced math courses so that doesn't help either.
Firms that make markets in options killed it in 2008. One of my relatives deals in this business in London. I desperately tried to see if I could get a position with them, but without computer programming skills or a background in quantitative finance I was bluntly viewed worthless to them. The head guy also only hires individuals with a MBA. I guess there are just higher standards in Europe.
He recommended that I try the Chicago area market makers firms because they also did very well. Unfortunately I've had no luck there either... I have a bachelors from a good liberal arts college, but essentially no computer programming skills. I haven't taken any advanced math courses so that doesn't help either.
Sir, if the barrier to entry to become an exchange member were so easy, I would help make those markets. The way everything in Chicago currently trades with only a few able to buy and sell the bids and offers respectively, and the vast majority of the trading population trading across the spread is asinine.
Once again, it is obvious to anyone with a lick of sense that a market that is made by one individual is assuredly an inefficient one.
Go ahead and tell me I'm talking out of my ass again. I could care less. I am right.
Once again, it is obvious to anyone with a lick of sense that a market that is made by one individual is assuredly an inefficient one.
Go ahead and tell me I'm talking out of my ass again. I could care less. I am right.
yes, you are talking out of your ass again, if you think you can arb anything you should try this off floor, it should be easy as commissions have come down so much and the prices are 'way off' according to you. You have no idea whatsoever what you are talking about ... you couldn't deltahedge yourself out of a paper bag ...
o, wait a minute, you probably don't know what greeks are ...
o, wait a minute, you probably don't know what greeks are ...
"Similarly to the early 2000 events, following the market slump at the end of last year investors again reduced their activity. Again, volume didn't change much. Why? Because at the same time many trading corporations that became partially idled by the seizure of credit markets were forced to focus more on areas where regular trading profits were still attainable. Among the very few of these were once again the listed options market. Public customer volume went from 50% to as low as 20% on some option exchanges. If you consider the fact that much of these took much of the so called public customer volume was in fact professional true investor volume must have gone below 10% of total listed option volume.
continued-
As the investors are leaving the options market they were more than replaced by renewed market making interest and more and more high frequency traders who act like market makers, competing [inaudible] off. As a result, [mid] spreads in the listed option markets contracted from the fourth quarter of 2008 to the first quarter of 2009 by approximately 40%; a surprisingly large amount. The market makers expected profit can be guestimated as the sustaining volume times the realized spread, plus or minus profits are originating from some random element such as actual versus implied volatility, currency movement, number of takeovers and other miscellaneous factors.
While we depend on the spread for our profit, we do not earn the entire spread but only some part of it. The rest goes for risk reduction. So when spreads decline but our appetite for risk remains constant, our profits decline by more. This largely explains our market making result for the quarter. My reason for putting them in the context of similar events in the past is to give you an indication of how these situations have resolved themselves before because the same thing is likely to occur this time. This is not the first time we are going through this kind of spread contraction and what is likely to happen is similar to what has happened on previous occasions.
Competition will continue and possibly increase for awhile longer. Quoted spreads and realized spreads may come in a bit low. Market makers will continue to try to enhance the effectiveness of their software. Some of the new entrants and weaker competitors will start running at a loss and leave the business. Others will be attracted by more lucrative opportunities elsewhere. Spreads will eventually stabilize and then expand a little. Investor volume, attracted by lower spreads will start increasing again. Listed options will continue to gain in popularity and market making profits driven by increasing volumes will again go into a growing trajectory."
from transcript of IB earnings release april 2009.
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your call for government intervention shows your understanding of economics is abysmal. without government interference excess returns are competed away.
As the investors are leaving the options market they were more than replaced by renewed market making interest and more and more high frequency traders who act like market makers, competing [inaudible] off. As a result, [mid] spreads in the listed option markets contracted from the fourth quarter of 2008 to the first quarter of 2009 by approximately 40%; a surprisingly large amount. The market makers expected profit can be guestimated as the sustaining volume times the realized spread, plus or minus profits are originating from some random element such as actual versus implied volatility, currency movement, number of takeovers and other miscellaneous factors.
While we depend on the spread for our profit, we do not earn the entire spread but only some part of it. The rest goes for risk reduction. So when spreads decline but our appetite for risk remains constant, our profits decline by more. This largely explains our market making result for the quarter. My reason for putting them in the context of similar events in the past is to give you an indication of how these situations have resolved themselves before because the same thing is likely to occur this time. This is not the first time we are going through this kind of spread contraction and what is likely to happen is similar to what has happened on previous occasions.
Competition will continue and possibly increase for awhile longer. Quoted spreads and realized spreads may come in a bit low. Market makers will continue to try to enhance the effectiveness of their software. Some of the new entrants and weaker competitors will start running at a loss and leave the business. Others will be attracted by more lucrative opportunities elsewhere. Spreads will eventually stabilize and then expand a little. Investor volume, attracted by lower spreads will start increasing again. Listed options will continue to gain in popularity and market making profits driven by increasing volumes will again go into a growing trajectory."
from transcript of IB earnings release april 2009.
_____________
your call for government intervention shows your understanding of economics is abysmal. without government interference excess returns are competed away.
hmm, "he" wants MBAs or guys with strong math backgrounds? Chose one you can't have both!!!
Truth is pretty much ALL OTC options market making is done through human intervention and decision making. (and I speak especially for index options, regardless whether S&P, EuroStoxx, Nikkei, Kospi, HSI, ... and no matter whether in Asia, NY, or London). How does a machine price a call spread or calendar spreads or butterflies when the request arrives through bloomberg message or over the phone and especially when the request exceeds standard size? But maybe you Londoners must be extra smart, smarter than the rest of the world ;-)
Truth is pretty much ALL OTC options market making is done through human intervention and decision making. (and I speak especially for index options, regardless whether S&P, EuroStoxx, Nikkei, Kospi, HSI, ... and no matter whether in Asia, NY, or London). How does a machine price a call spread or calendar spreads or butterflies when the request arrives through bloomberg message or over the phone and especially when the request exceeds standard size? But maybe you Londoners must be extra smart, smarter than the rest of the world ;-)
cvds16 is correct. I would estimate that 30% of the CBOE sole props blew out in the last year. Of the institutional firms, most of the traders are now upstairs and anyone left on the floor are index MMs/traders. The equity MMs left on the floor are DPMs.
You want proof? Numbers don't lie:
http://www.pionline.com/article/20090424/REG/904249964
Equity options are extremely efficient. That doesn't mean there aren't still star traders, but only the well capitalized with great technology and low costs, and the best, are left.
Similar events have taken place in ED options, a market that was HUGE by comparison is now dead.
You want proof? Numbers don't lie:
http://www.pionline.com/article/20090424/REG/904249964
Equity options are extremely efficient. That doesn't mean there aren't still star traders, but only the well capitalized with great technology and low costs, and the best, are left.
Similar events have taken place in ED options, a market that was HUGE by comparison is now dead.
either the markets are efficient or they are not, if they are not efficient, you should be able to lease a seat and make lots of money out of them, if not they are efficient ... case closed ...
EDIT: this was mainly in reply to a post that has been removed.
market making enhalse lots of risk, much more than you seem to be aware off, it's very far from free money that's the other point I was trying to make.
EDIT: this was mainly in reply to a post that has been removed.
market making enhalse lots of risk, much more than you seem to be aware off, it's very far from free money that's the other point I was trying to make.