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Of course market makers are trying to maximize profit: they are trading firms just like any others. However, retail order flow is (pretty much by definition) n

by smabie 5y ago

Of course market makers are trying to maximize profit: they are trading firms just like any others. However, retail order flow is (pretty much by definition) not particularly valuable information: if it was, wholesalers would be unwilling to consistently take the other side at such good prices. Of course order flow in general is highly valuable information, it's just that retail order flow isn't because it's very non-toxic (there is little to no predictive signal in the flow).

camgunz 5y ago
Sure, but then why doesn't every exchange just warehouse? This is the same principle as Bitcoin's Lightning network: the layer 1 network (the exchange) is too slow, so we have a layer 2 network (the warehouse) that buffers it. OP dismisses this out of hand because it would be a "monopoly" and jack fees. But has that been the case for the NYSE in other areas? I bet it hasn't been. What it seems like is that these trading houses are padding their percentages by being market makers, and padding their models with order flow. Retail investors can do neither, so I think it's reasonable to say this isn't super fair.
- smabie 5y ago
  I dont work for a wholesaler so can't comment about how/if retail flow is used as a signal but if it is, I really don't think the information is super important (atleast 99% of the time). Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. Also most trading firms are market makers. it's not really a hard and fast line, anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money)
  - camgunz 5y ago
    > Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. That's an excellent point yeah. I do buy that this is a tempest in a tea cup relative to all that. > anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money) Yeah I buy that too I mean, we can refer to it as "the modeling" but, I'm sure it's pretty complicated. I learned a lot in our little thread! Thanks for talking w/ me :)

by smabie 5y ago

camgunz 5y ago

Sure, but then why doesn't every exchange just warehouse? This is the same principle as Bitcoin's Lightning network: the layer 1 network (the exchange) is too slow, so we have a layer 2 network (the warehouse) that buffers it. OP dismisses this out of hand because it would be a "monopoly" and jack fees. But has that been the case for the NYSE in other areas? I bet it hasn't been. What it seems like is that these trading houses are padding their percentages by being market makers, and padding their models with order flow. Retail investors can do neither, so I think it's reasonable to say this isn't super fair.

smabie 5y ago
I dont work for a wholesaler so can't comment about how/if retail flow is used as a signal but if it is, I really don't think the information is super important (atleast 99% of the time). Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. Also most trading firms are market makers. it's not really a hard and fast line, anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money)
- camgunz 5y ago
  > Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. That's an excellent point yeah. I do buy that this is a tempest in a tea cup relative to all that. > anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money) Yeah I buy that too I mean, we can refer to it as "the modeling" but, I'm sure it's pretty complicated. I learned a lot in our little thread! Thanks for talking w/ me :)