MarketMaker techniques

Quote from luckybastard:

Dumb = you don't need any brains to do the job: HO does the thinking for you. Smart = you need to pass the most difficult screening tests in the industry to get the job and you'll need to use your brains to get your job done. And no, that doesnt necessarily translate directly into profit, I've never said that.
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Ah, you got us pegged and you're absolutely right. Now that I think of it, I often wonder why the vast majority of our desk wasted their time obtaining PhD's and Master degrees when all they do is come to work, make a cup of jo and flip on a switch. But sssh please don't pass this along as I don't want to secret to get out :)
 
Cost structure is 20c/1000 shares, all other fees are standard. I tried hedging with etfs but its never a perfect hedge, so gross is important.

I think I need to run the model as long as possible on the stocks that are able to maintain a positive gross the longest. What worries me is the gross profit margin avg of 0.05 percent. But then again casinos operate on some thin margins and still manage to be profitable.
 
Just before LEH crash, a mysterious trader bought a boat-load of deep OTM put. He certainly had the insider info and made a fortune.

I read this story somewhere but doesn't it mean that someone also lost same amount of money (as derivative marketvis zero sum game).

If someone has insider info that ABC company will drop 40% in 2 weeks and buying 100K OTM puts for pennies (which will become 20 times in 2 weeks). How will market maker save his back in this scenario. What will be his hedge?

He is going to lose few millions - isn't it?

---------- I guess op is talking equity MMs -------

I'm not sure if any equity MM is going to reveal his secret. They have full control over price so they can never lose. If their trading a/c is at low level, they'll crash the stock and build inventory. After inventory level is good, they'll rally and at the top dump everything and do tons of naked short. Then drop the price again and repeat the process. They do it at every time frame... One who can fix the price can never lose.
 
Quote from TraderSU:


I'm not sure if any equity MM is going to reveal his secret. They have full control over price so they can never lose. If their trading a/c is at low level, they'll crash the stock and build inventory. After inventory level is good, they'll rally and at the top dump everything and do tons of naked short. Then drop the price again and repeat the process. They do it at every time frame... One who can fix the price can never lose.
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I don't think market makers have much control over anything anymore, as liquidity addition is now distributed amongst many types of firms/individuals -- even the buyside, particularly in the dark pools.

In fact, I doubt that market makers ever had nearly the control that your conspiracy theory seems to posit. Not even in 1999, when they had a much greater share of liquidity provision.
 
Quote from TokyoGhetto:

Cost structure is 20c/1000 shares, all other fees are standard. I tried hedging with etfs but its never a perfect hedge, so gross is important.

I think I need to run the model as long as possible on the stocks that are able to maintain a positive gross the longest. What worries me is the gross profit margin avg of 0.05 percent. But then again casinos operate on some thin margins and still manage to be profitable.
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Hey Tokyo,

I am trying to figure out some of the standard MM algorithms. There are a few academic papers on Google Scholar and I've started reading Empirical Market Microstructure by Hasbrouck. I realize what's done in practice is likely much more advanced - but I want to understand the theory and what impacts strategy.

In trying to actually deploy some of these strategies, I've found lots of little technical hurdles in order management. Can I ask what platform/API and programming language you are using? Feel free to PM.
 
Quote from StillStanding:

Hi

How do big firm market makers handle trend risk?

If always maintining bid/ask spread , then a rapid trend move could result in them averaging down all day against the trend ending up with enormous losses at end of day.

How do they avoid this?

Do they carry over the loss?

Do they stop averaging down at some point?

Do they bail out at some point? if so when?

Do they keep moving the average down point further away as their losing position grows?

Any former professional market makers working for a big firm on this forum ?

Thanks
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there are a lot of ways to manage risk. To answer your questions:

buying as they: yes, that can and has happened and taken down firms.

avoid: reducing size and increasing the spread, thus reducing exposure also hedging (if they can)

they can't bail (stop making a two sided market) unless they're bankrupt, but they can provide you a penny bid at $100 market and that's pretty much "bailing". No firm is obligated to go out of business to provide a bid for you.
 
Quote from def:

Ah, you got us pegged and you're absolutely right. Now that I think of it, I often wonder why the vast majority of our desk wasted their time obtaining PhD's and Master degrees when all they do is come to work, make a cup of jo and flip on a switch. But sssh please don't pass this along as I don't want to secret to get out :)
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Sorry mate, just telling you the way it is, at least WAS, when I was an MM in Amsterdam. Timberhill MM's were called 'robots' and that was because they didnt have to think themselves: HO programmed volatility and when a broker came into the crowd, they'd just buy below and sell above the IV that their handheld displayed. They didnt have respect like the Optiver guys had for example and it was one of the companies you could get in pretty easily.
I'm sure they made good money though, everybody did.
 
Quote from occam:

I would take whatever you find on zerohedge with a grain of salt. It seems the author has an ax to grind and merely cherry-picks studies/articles/quotes that support opinions he already has.
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is that the same zero hedge that's been 100% bearish since S&P 666?

Or another one?
 
Market makers generally roll position to beta correlated products and will hold overnight or for days when needed. Also most maket makers are part of a large firm that has a global manager that handles overall systematic risk. (Large index move up or down)

...greg
 
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