6 ms·

Market making is inherently prop trading - the firm's capital is at risk - unless trades are paired or hedged immediately. For thinly traded stuff that may tak

by jhulla 10y ago

Market making is inherently prop trading - the firm's capital is at risk - unless trades are paired or hedged immediately. For thinly traded stuff that may take a while to unload, it is just prop trading. I personally think Banks should be incredibly boring utilities. But that ship sailed a long time ago. Lots of great stuff was thrown out the window in January. My winning bet for the year was to start buying EWC (ishares Canada) during the market lows. You say "and the mood these days is like a morgue". Please elaborate.

lordnacho 10y ago
The mood among bank staff... everything is shut down by compliance, and if they could, they'd work in a different industry. People I know at banks, anyway.
- stcredzero 10y ago
  The mood among bank staff... everything is shut down by compliance In what sense is "everything shut down by compliance?" Is compliance so cumbersome, that no one can be arsed to do any big trades?
  - totalZero 10y ago
    Imagine tons of meetings about new/impending regulations that are unclear, poorly defined, restrictive, and enforced by regulatory employees who don't always understand the nuances of the businesses they are overseeing. Imagine your compliance officer coming over to you or a coworker to give you news of an investigation of trading activity that happened months ago. Imagine banks hiring compliance employees to keep up with a growing number of regulations, and firing IT guys to pay for it. Imagine being quoted on the biggest trade of the year by a client who is screaming at your salesman for a price, and having to mentally iterate through a checklist of "is this over X dollars notional, does it surpass Y position limit, etc" because you have been in ten different meetings where compliance officers passed out Powerpoint presentations outlining new rules. Imagine seeing an opportunity for a great trade, but doing nothing about it because you can't justify opening a new position in a subsector where you have no client positions. Imagine having your emails and messages frequently investigated by regulatory bodies because they were flagged by a word search or some other unsophisticated screening tool, and being asked to write an explanation of months-old conversations that you have since forgotten. After a while, you don't feel comfortable putting anything in writing at all, even if you follow every rule in the book.
    - RyanHamilton 10y ago
      >> if they could, they'd work in a different industry Imagine you make 10 times the national average salary
      - lordnacho 10y ago
        But you live in an expensive place and pay a lot of tax. Plus the politics in a shrinking industry, you need a big premium to suffer through it. A lot of people who work in banks do not have a particular love of the industry, they're there because it's what paid well when they finished university.
smallnamespace 10y ago
If you prevent banks from doing the riskier forms of market making, then that responsibility will move to firms that don't have access to customer deposits. Because their capital base is less stable, they will be more prone to stop making markets precisely when you need them most. That will probably make extreme volatility events like flash crashes much more likely. This is already happening today to some extent: [1] https://www.bloomberg.com/view/articles/2016-10-07/flash-crashes-and-insider-trading https://www.bloomberg.com/view/articles/2016-10-07/flash-cra... [2] https://www.bloomberg.com/view/articles/2015-06-03/people-are-worried-about-bond-market-liquidity https://www.bloomberg.com/view/articles/2015-06-03/people-ar... 'In the new system, the market makers are computers, and when things get hairy they just stop buying pounds and walk away with their computer hands in their computer pockets, whistling a jaunty tune out of their computer speakers.'
- Retric 10y ago
  Volatility can be highly valuable in the long term to keep markets honest. Without that there is a tendency to add leverage until something far more significant breaks down.
  - smallnamespace 10y ago
    Generally not this sort of volatility though: https://en.wikipedia.org/wiki/2010_Flash_Crash https://en.wikipedia.org/wiki/2010_Flash_Crash
    - Retric 10y ago
      The S&P 500 erased all losses within a week, but selling soon took over again and the indices reached lower depths within two weeks. So, arguably the rebound is what was odd not the dip. There is a bias when looking at stock markets that says up is good and down is bad. However, accuracy is vastly i more important for the overall economy.
  - mannykannot 10y ago
    It doesn't work that way if you make significant bonuses on the wins and the client takes the losses.
bogomipz 10y ago
Would you mind explaining what prop trading is? I am not familiar with this term. From what I know of market making however is that you match a buyer and a seller of an asset, correct? If I do have this correct about market making. Are they playing ask buy spread? Whose best interests is the market maker supposed to look out for? The buyers? The seller? Some combination therein?
- branchless 10y ago
  Market making you provide a buy and a sell price and keep the spread for your "service". Prop trading: you buy or sell based on a guess which way things will go and hold that position then exit at (you hope) a profit. Normally the big book of banking says market makers "provide liquidity" which in my experience is enough to make most people in banking stop right there as providing liquidity is to them akin to passing bread to orphans.
  - bogomipz 10y ago
    Thanks, question: "as providing liquidity is to them akin to passing bread to orphans." I'm not following your meaning there. Meaning? Also, is every brokerage also a market maker?
    - nerdponx 10y ago
      Providing liquidity is a service, so institutions expect to be paid for that service
    - frandroid 10y ago
      Brokerages pass on trades to market makers. They don't promise a price, they just tell you which price is available through market makers, and when you decide to go ahead with a trade, they go on the market, and you hope that the price market makers were advertising earlier is still what they're offering when you come through. Brokerages make a profit by passing on your order and taking a percentage of your total sale, not by making a profit on the spread.
    - 10y ago
branchless 10y ago
> I personally think Banks should be incredibly boring utilities. But that ship sailed a long time ago. We can drag them back to harbour any time we want. Let's keep fighting.
FabHK 10y ago
You could maybe convincingly argue that most market making is somewhat prop in nature, but surely not every prop trade is even remotely anywhere close to market making. As such, you can distinguish them, and arguing that they're "inherently" the same or indistinguishable, say, for regulatory purposes, is disingenuous.
missbit 10y ago
Could AI be used to simply monitor markets & look for asset bubbles forming? Just to give a warning sign to regulators?
- vlodiag 10y ago
  You can program something only if you know what you need to program. You can't program AI to do that because humans themselves don't know when the bubble is forming.

by jhulla 10y ago

lordnacho 10y ago

The mood among bank staff... everything is shut down by compliance, and if they could, they'd work in a different industry. People I know at banks, anyway.

stcredzero 10y ago
The mood among bank staff... everything is shut down by compliance In what sense is "everything shut down by compliance?" Is compliance so cumbersome, that no one can be arsed to do any big trades?
- totalZero 10y ago
  Imagine tons of meetings about new/impending regulations that are unclear, poorly defined, restrictive, and enforced by regulatory employees who don't always understand the nuances of the businesses they are overseeing. Imagine your compliance officer coming over to you or a coworker to give you news of an investigation of trading activity that happened months ago. Imagine banks hiring compliance employees to keep up with a growing number of regulations, and firing IT guys to pay for it. Imagine being quoted on the biggest trade of the year by a client who is screaming at your salesman for a price, and having to mentally iterate through a checklist of "is this over X dollars notional, does it surpass Y position limit, etc" because you have been in ten different meetings where compliance officers passed out Powerpoint presentations outlining new rules. Imagine seeing an opportunity for a great trade, but doing nothing about it because you can't justify opening a new position in a subsector where you have no client positions. Imagine having your emails and messages frequently investigated by regulatory bodies because they were flagged by a word search or some other unsophisticated screening tool, and being asked to write an explanation of months-old conversations that you have since forgotten. After a while, you don't feel comfortable putting anything in writing at all, even if you follow every rule in the book.
  - RyanHamilton 10y ago
    >> if they could, they'd work in a different industry Imagine you make 10 times the national average salary
    - lordnacho 10y ago
      But you live in an expensive place and pay a lot of tax. Plus the politics in a shrinking industry, you need a big premium to suffer through it. A lot of people who work in banks do not have a particular love of the industry, they're there because it's what paid well when they finished university.

smallnamespace 10y ago

If you prevent banks from doing the riskier forms of market making, then that responsibility will move to firms that don't have access to customer deposits. Because their capital base is less stable, they will be more prone to stop making markets precisely when you need them most. That will probably make extreme volatility events like flash crashes much more likely. This is already happening today to some extent: [1] https://www.bloomberg.com/view/articles/2016-10-07/flash-crashes-and-insider-trading https://www.bloomberg.com/view/articles/2016-10-07/flash-cra... [2] https://www.bloomberg.com/view/articles/2015-06-03/people-are-worried-about-bond-market-liquidity https://www.bloomberg.com/view/articles/2015-06-03/people-ar... 'In the new system, the market makers are computers, and when things get hairy they just stop buying pounds and walk away with their computer hands in their computer pockets, whistling a jaunty tune out of their computer speakers.'

Retric 10y ago
Volatility can be highly valuable in the long term to keep markets honest. Without that there is a tendency to add leverage until something far more significant breaks down.
- smallnamespace 10y ago
  Generally not this sort of volatility though: https://en.wikipedia.org/wiki/2010_Flash_Crash https://en.wikipedia.org/wiki/2010_Flash_Crash
  - Retric 10y ago
    The S&P 500 erased all losses within a week, but selling soon took over again and the indices reached lower depths within two weeks. So, arguably the rebound is what was odd not the dip. There is a bias when looking at stock markets that says up is good and down is bad. However, accuracy is vastly i more important for the overall economy.
- mannykannot 10y ago
  It doesn't work that way if you make significant bonuses on the wins and the client takes the losses.

bogomipz 10y ago

Would you mind explaining what prop trading is? I am not familiar with this term. From what I know of market making however is that you match a buyer and a seller of an asset, correct? If I do have this correct about market making. Are they playing ask buy spread? Whose best interests is the market maker supposed to look out for? The buyers? The seller? Some combination therein?

branchless 10y ago
Market making you provide a buy and a sell price and keep the spread for your "service". Prop trading: you buy or sell based on a guess which way things will go and hold that position then exit at (you hope) a profit. Normally the big book of banking says market makers "provide liquidity" which in my experience is enough to make most people in banking stop right there as providing liquidity is to them akin to passing bread to orphans.
- bogomipz 10y ago
  Thanks, question: "as providing liquidity is to them akin to passing bread to orphans." I'm not following your meaning there. Meaning? Also, is every brokerage also a market maker?
  - nerdponx 10y ago
    Providing liquidity is a service, so institutions expect to be paid for that service
  - frandroid 10y ago
    Brokerages pass on trades to market makers. They don't promise a price, they just tell you which price is available through market makers, and when you decide to go ahead with a trade, they go on the market, and you hope that the price market makers were advertising earlier is still what they're offering when you come through. Brokerages make a profit by passing on your order and taking a percentage of your total sale, not by making a profit on the spread.
  - 10y ago

branchless 10y ago

> I personally think Banks should be incredibly boring utilities. But that ship sailed a long time ago. We can drag them back to harbour any time we want. Let's keep fighting.

FabHK 10y ago

You could maybe convincingly argue that most market making is somewhat prop in nature, but surely not every prop trade is even remotely anywhere close to market making. As such, you can distinguish them, and arguing that they're "inherently" the same or indistinguishable, say, for regulatory purposes, is disingenuous.

missbit 10y ago

Could AI be used to simply monitor markets & look for asset bubbles forming? Just to give a warning sign to regulators?

vlodiag 10y ago
You can program something only if you know what you need to program. You can't program AI to do that because humans themselves don't know when the bubble is forming.