Market makers

[sameeh55]

Just 3 questions.

1- Is there any other source of revenue for MMs aside from the spread?

2- If the spread of the liquidity providers for these MMs fluctuate according to market conditions; won't that leave MMs exposed to losing on the spread if the liquidity provider's spread becomes wider than the MMS fixed spread?

3- How do MMs make markets for gold and crude? Is there any liquidity providers that these MMs pass their net expouser to?

Thanks guys

 

[lrm]

1- Is there any other source of revenue for MMs aside from the spread?

None that are specific to market makers; however, being a market maker may bring with it specific information advantages making speculation more lucrative.

2- If the spread of the liquidity providers for these MMs fluctuate according to market conditions; won't that leave MMs exposed to losing on the spread if the liquidity provider's spread becomes wider than the MMS fixed spread?

I'm not sure what you mean by the spread of the liquidity suppliers to the market maker. By definition, a market maker is selling liquidity.

Perhaps what you're referring to is how do market makers manager their inventories so as to reduce their directional risk?

3- How do MMs make markets for gold and crude? Is there any liquidity providers that these MMs pass their net expouser to?

I've no specific experience in gold or crude, but why would it be any different than any other market?

If you're interested in this sort of thing, I'd highly suggest you read Larry Harris' book, Trading and Exchanges: Market Microstructure for Practictioners. The chapters on dealers (market makers) go through these sorts of questions in detail.

Take care,

Louis

 

[sameeh55]

Quote from lrm:

"I'm not sure what you mean by the spread of the liquidity suppliers to the market maker. By definition, a market maker is selling liquidity.

Perhaps what you're referring to is how do market makers manager their inventories so as to reduce their directional risk?"

As far as I understand it, some MMs hedge their "NET" exposure by passing their orders to other liquidity providers. If these liquidity providers (Institutional) widen their spread according to market condition. And if the MM offers a fixed spread to its clients (as some of them do), won't that leave the MM exposed on losing if the liquidity provider's spread is wider than theirs?

Thanks for your generous assistance Louis