I have always wondered how MM these days make $$ given the sheer number of options exchanges alone (16?) in equities. I have a MM friend at IB and he tells me they get picked off enough which surprised me bec I always thought that Ib had a good enough technology against that. A question I've always pondered ever since I left the floor in the NYBOT was --who makes markets in the futures space nowadays. I would think the $$ is still there since there is very little competition vs. equities with its 16 exchanges. Like CL , KC, SB , OJ options. Who are the participants? In the 1990-2005(?) a guy can put up 100k in a futures acct like Gelderman, Refco in return for a guarantee to the exchange, lease a seat for $300-$1000/mo, get 25 cents per side, scalp all day and put on enough positions to make it worth it. How is it done now? I would think 100k is now a pittance to start?
They still have market makers?! What does it take?
- Thread starter Saltynuts
- Start date
Very interesting reading, thanks everyone! I'm going through the posts a second time, but a few follow-up questions.
I was really thinking about market makers in stocks, but I'm curious if they are handled differently in other markets.
So I see the market maker makes money on the bid-ask spread. How do they get an advantage over someone who is not a formal market maker that is just holding a large position and selling and buying all the time on the bid ask spread? Like let's say there is a stock that has a $4.5 bid and a $4.65 ask. I as a retail could go through IB or TD Ameritrade and maybe bid $4.55 and when it hits turn around and offer at $4.6. So what advantage to market makers get over a non-market maker trying to do this? I assume they get some commission advantage (maybe they pay none), but do they also get some price benefit, and/or be able to "cut in line" in front of a high bid or low ask?
Are market makers absolutely obligated to stand ready to buy at the high bid and sell at the low ask? Or how is it determined if they are doing their job?
How do I know what stocks or securities and which don't?
I fully understand that in most cases these MMs are algorithms, just curious what privileges they get.
Also, mushinseeker, you mention a MM friend at IB saying they get picked off a lot - what do you mean by picked off?
Thanks!
I was really thinking about market makers in stocks, but I'm curious if they are handled differently in other markets.
So I see the market maker makes money on the bid-ask spread. How do they get an advantage over someone who is not a formal market maker that is just holding a large position and selling and buying all the time on the bid ask spread? Like let's say there is a stock that has a $4.5 bid and a $4.65 ask. I as a retail could go through IB or TD Ameritrade and maybe bid $4.55 and when it hits turn around and offer at $4.6. So what advantage to market makers get over a non-market maker trying to do this? I assume they get some commission advantage (maybe they pay none), but do they also get some price benefit, and/or be able to "cut in line" in front of a high bid or low ask?
Are market makers absolutely obligated to stand ready to buy at the high bid and sell at the low ask? Or how is it determined if they are doing their job?
How do I know what stocks or securities and which don't?
I fully understand that in most cases these MMs are algorithms, just curious what privileges they get.
Also, mushinseeker, you mention a MM friend at IB saying they get picked off a lot - what do you mean by picked off?
Thanks!
picked off like his mkt is 4/4.1 and suddenly he gets lifted for size on 4.1 , then news breaks and now he is short gamma with stock up $5
Would you say you're a successful trader, mushinseeker? Large account size and/or % returns generated,
I've always wondered how those guys on the trading Floor perform, -- Are they all Super Successful Traders?
When you're trading from home, on your laptop PC alone...seeing those guys on the trading floor looks like NBA Big Time Professionals -- or is that just an illusion or stereotype?
Far from it... Floor is easy! There is a HUGE structural edge being on the floor- cheap commish, b/a spread, no worry about fat finger, or internet connectivity right bef mkt closes. Picked up a lot of bad habits too. If I were to do it all over again, I would've preferred making less on the desk but more steady,more discipline, more data mining,more science.As far as income distribution- lots of floor traders who did not adopt science had huge + and huge - , couple w the ignorance of not paying the IRS had catastrophic endings. People who did (normally employed by the quant shops ) like Singer Wenger, Timber hill, CRT had good careers, they would go in a pit, and start slinging 50 and 100 lots while locals like me were stuck with 5,20,and occasionally 50 lots. Then there are the very select few unicorns who found a niche, mostly spreaders, superquiet and made millions. A Crack spreader no one has heard of - Robert H, had an HP calculator and when big oil co need mkt in heating oil/ crude crack, he was there like 100 up, I think. Mark Fisher took his ACd method , made lots in crude,etc. so yes there are a few, and also don't forget the $2 brokers. very little infastructure spending except for a $1000/mo seat, a booth and a clerk...pick up a phone from a customer, yell to buy 200 lots, write it down ,bill the guy $400 for 1 min worth of work. that is the biggest racket. Wish I had a $2 broker business.
This is the funniest thing I've ever heard
O'Connor's FTW
Back in the day, the years on either side of the '87 crash, I was an assistant trader on the trade desk of one of just a handful of West Coast market making firms. We dealt OTC and NASDAQ stocks.
Since then, rules and regs, amongst other changes, and the business was way different than it is today. Certain things will never change much, but this is how it was back then...
1) The MM trade desk was a WHOLESALE operation... each stock was a separate sku so to speak, and inventory for each sku was bought or sold. The desk was the opposite side of in-house brokers, and orders from other trading desks nationwide, aka "the street".
2) NET POSITION is what mattered. At EOD, each sku was either NET short, NET long, or flat( ie. no inventory position). Positions could be carried INDEFINITELY, so long as the necessary trading capital was maintained.
3) As mentioned above, this was a wholesale operation. When selling was occurring, the desk was buying and vice versa. If the desk was selling it may have been because of a net long position, where the stock was coming out of inventory(with a profit) OR it could have been creating or adding to a net short position. When the desk was buying, it could have been accumulation of a long position, or covering of a short position(with a profit). Remember the broker incentives to "promote" certain stock to the clientele in the Wolf of Wall Street? It's because the trade desk had a net position, and usually at HUGE, and I mean HUGE profit based on then current pricing.
As an assistant trader on the desk, I was allowed to maintain a small clientele book. My biggest "commission" as principal, was over 20K on one trade. No conflict of interest there! LOL. The desk made money, I made money, the client... well, I was on the desk... my clients did fine, except when they didn't. No conflict of interest there either! This was decades ago.
Since then, rules and regs, amongst other changes, and the business was way different than it is today. Certain things will never change much, but this is how it was back then...
1) The MM trade desk was a WHOLESALE operation... each stock was a separate sku so to speak, and inventory for each sku was bought or sold. The desk was the opposite side of in-house brokers, and orders from other trading desks nationwide, aka "the street".
2) NET POSITION is what mattered. At EOD, each sku was either NET short, NET long, or flat( ie. no inventory position). Positions could be carried INDEFINITELY, so long as the necessary trading capital was maintained.
3) As mentioned above, this was a wholesale operation. When selling was occurring, the desk was buying and vice versa. If the desk was selling it may have been because of a net long position, where the stock was coming out of inventory(with a profit) OR it could have been creating or adding to a net short position. When the desk was buying, it could have been accumulation of a long position, or covering of a short position(with a profit). Remember the broker incentives to "promote" certain stock to the clientele in the Wolf of Wall Street? It's because the trade desk had a net position, and usually at HUGE, and I mean HUGE profit based on then current pricing.
As an assistant trader on the desk, I was allowed to maintain a small clientele book. My biggest "commission" as principal, was over 20K on one trade. No conflict of interest there! LOL. The desk made money, I made money, the client... well, I was on the desk... my clients did fine, except when they didn't. No conflict of interest there either! This was decades ago.
I assume your friend was at Timberhill? I don't know much about their US business or market making in the cash market etc... but I always considered their options MM in Europe to be pathetic. I don't think they did a lot of OTC trading, only on-screen which is peanut sizes... that doesn't cover costs.
There is a reason IB wanted to get rid of TH, that's bc they don't make any money... likely bc they s#&cked at market making in the last 10-15 years. IB managed to get brokerage retail/prof clients in on the back of TH's worldwide coverage... that was the best part for IB I guess.
But, that's my opinion from European markets... don't know how they did in the US etc.
The big guys trade everything... so even if they lose on one little trade when the stock (or options or whatever) trades through their bid, they make enough on all products combined. They are also hedging on a portfolio basis... desk and/or global... flattening out risks on a what's best/cheapest basis.
If you have one guy or relatively small firm trading just 2 products or daytrading on a single person basis compared to MM's team oriented global basis, he loses out on the fact that he doesn't see all that's happening. He's focused on just a few.
This is why I don't believe in that BS that I sometimes read that the best traders trade alone. They don't... the best traders work in teams sharing info and strategies, capital and infra... so combined they have more knowledge and power. More eyes = more opportunities.
Also, MM's usually rely more heavily on tech infrastructure. So it's likely that their connections are faster than the guy next door. So they have a big advantage there. And of course they get discounts on fees etc... and depending on which exchange, priority etc.