3 ms·

Sorry, what's your source for this archetype? I thought maybe the place I worked for was just weird, but I've just looked at a half-dozen sources and as far as

Sorry, what's your source for this archetype? I thought maybe the place I worked for was just weird, but I've just looked at a half-dozen sources and as far as I can tell, we were pretty typical.

JumpCrisscross 5y ago
> what's your source for this archetype? I’d have to dig up the textbook sources, but the key bit is in the definition: market makers quote a two-sided market and make money from the spread [1], i.e. buying at the bid and selling at the offer. If it happens simultaneously, that’s ideal. Every second one is long or short, risk and cost are incurred. Market makers seek to minimise and manage these. In practice, arbitrage is tough. So most market makers simulate simultaneity by hedging. For example, if longs are accumulating (e.g. due to specialist obligations) one might open shorts or buy positional puts or wing it by shorting SPYs. An unhedged market maker is just day trading. [1] https://www.investopedia.com/terms/m/marketmaker.asp#what-is-a-market-maker https://www.investopedia.com/terms/m/marketmaker.asp#what-is...
- hhmc 5y ago
  > i.e. buying at the bid and selling at the offer. Really they _quote_ simultaneously the bid and offer (although there will be times when they do only one or neither). Saying they simultaneously buy/sell is wrong/confusing.
  - JumpCrisscross 5y ago
    > Saying they simultaneously buy/sell is wrong/confusing That wasn’t claimed. What was said is the archetype is simultaneity. That is 100% accurate for how the term “market maker” has been used, globally, since at least 1999. (Pre-GLB/LTCM and post-ECN, the term was used more broadly.) Drift from simultaneity incurs cost and risk. Those costs and risks must be managed. If you aren’t thinking in those terms, you aren’t market making. Zillow’s downfall mirrors that of the money-centre banks in securities dealing post-GLB leading up to the crisis. What does and does not constitute market making, which is risky but less so than leveraged day trading, was a huge area of policy concern. When non MMs think of themselves as market makers, there is a predictable set of risks they get downed by. Zillow, like so many others, fell prey to that misconception. (There is loose analogy in the ABS markets, where banks holding inventory of esoteric products, either badly hedged or hedged with a busted counterparty, got hosed.)
    - hhmc 5y ago
      You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to. No market making practioners would think in these terms.
      - JumpCrisscross 5y ago
        > You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to Of course you can. This is the entire thesis with which HFT beat out old-school market makers in securities.
        hhmc 5y ago
        I think you maybe have some misunderstandings around the practicalities limit orders and market microstructure (not withstand some theoretical model of risk free market-making, which has broadly been superseded, if you care about the theory at all).
        JumpCrisscross 5y ago
        > you maybe have some misunderstandings around the practicalities limit orders and market microstructure Perhaps. I haven’t been on a market-making desk for close to a decade now. But to correct one misconception in your comment, market makers don’t commonly use limit orders. (You’d submit a quote and try to hit rebates.)
        hhmc 5y ago
        > But to correct one misconception in your comment, market makers don’t commonly use limit orders. (You’d submit a quote and try to hit rebates.) They do in the asset classes I work with, YMMV
        kgwgk 5y ago
        How are quotes different from limit orders? [Edit: apart from the originator, I mean.]

Sorry, what's your source for this archetype? I thought maybe the place I worked for was just weird, but I've just looked at a half-dozen sources and as far as I can tell, we were pretty typical.

JumpCrisscross 5y ago

> what's your source for this archetype? I’d have to dig up the textbook sources, but the key bit is in the definition: market makers quote a two-sided market and make money from the spread [1], i.e. buying at the bid and selling at the offer. If it happens simultaneously, that’s ideal. Every second one is long or short, risk and cost are incurred. Market makers seek to minimise and manage these. In practice, arbitrage is tough. So most market makers simulate simultaneity by hedging. For example, if longs are accumulating (e.g. due to specialist obligations) one might open shorts or buy positional puts or wing it by shorting SPYs. An unhedged market maker is just day trading. [1] https://www.investopedia.com/terms/m/marketmaker.asp#what-is-a-market-maker https://www.investopedia.com/terms/m/marketmaker.asp#what-is...

hhmc 5y ago
> i.e. buying at the bid and selling at the offer. Really they _quote_ simultaneously the bid and offer (although there will be times when they do only one or neither). Saying they simultaneously buy/sell is wrong/confusing.
- JumpCrisscross 5y ago
  > Saying they simultaneously buy/sell is wrong/confusing That wasn’t claimed. What was said is the archetype is simultaneity. That is 100% accurate for how the term “market maker” has been used, globally, since at least 1999. (Pre-GLB/LTCM and post-ECN, the term was used more broadly.) Drift from simultaneity incurs cost and risk. Those costs and risks must be managed. If you aren’t thinking in those terms, you aren’t market making. Zillow’s downfall mirrors that of the money-centre banks in securities dealing post-GLB leading up to the crisis. What does and does not constitute market making, which is risky but less so than leveraged day trading, was a huge area of policy concern. When non MMs think of themselves as market makers, there is a predictable set of risks they get downed by. Zillow, like so many others, fell prey to that misconception. (There is loose analogy in the ABS markets, where banks holding inventory of esoteric products, either badly hedged or hedged with a busted counterparty, got hosed.)
  - hhmc 5y ago
    You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to. No market making practioners would think in these terms.
    - JumpCrisscross 5y ago
      > You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to Of course you can. This is the entire thesis with which HFT beat out old-school market makers in securities.
      - hhmc 5y ago
        I think you maybe have some misunderstandings around the practicalities limit orders and market microstructure (not withstand some theoretical model of risk free market-making, which has broadly been superseded, if you care about the theory at all).
        JumpCrisscross 5y ago
        > you maybe have some misunderstandings around the practicalities limit orders and market microstructure Perhaps. I haven’t been on a market-making desk for close to a decade now. But to correct one misconception in your comment, market makers don’t commonly use limit orders. (You’d submit a quote and try to hit rebates.)
        hhmc 5y ago
        > But to correct one misconception in your comment, market makers don’t commonly use limit orders. (You’d submit a quote and try to hit rebates.) They do in the asset classes I work with, YMMV
        kgwgk 5y ago
        How are quotes different from limit orders? [Edit: apart from the originator, I mean.]