4 ms·

The spread is tight for small orders, but if you keep hitting them in one direction, market makers quickly get wise to this and start pulling back. The cost to

The spread is tight for small orders, but if you keep hitting them in one direction, market makers quickly get wise to this and start pulling back. The cost to trade for large funds isn't just the bid-offer spread, but also how quickly the market reacts to their flow. Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. This is also why big funds want rules like trade-at (all orders must trade on-exchange) which eliminate the ability for market makers to explicitly segregate order flow. If all retail orders went to exchanges, market makers would give tighter prices on average to win the retail flows. Basically retail traders would subsidize institutional ones.

tptacek 11y ago
Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. My understanding was that it's mostly the opposite, that MMs profit from uninformed order flow (so much so that they'll buy access to it from brokerages), and that informed traders were their predators in the market food chain. At any rate: cost of trading has by every account I can find plummeted since the introduction of automatic trading. As recently as the 1990s, spreads were quoted in eighths of dollars, and there was widespread collusion to fix prices at quarters. In 70s and before, the markets were worse; basically organized fleecing operations.
- mrchicity 11y ago
  Yes I mean if I think the fair price of a stock is $100, and I knew who I was trading with, I might bid 99.99 offer 100.01 to a retail trader, but bid 99.95 offer 100.05 to a bank or hedge fund. The retail trader probably doesn't have short-term info and he's not going to keep trading in the same direction so I don't need to make as much spread. On exchange markets you can't really tell who you trade with so you have to guess.

tptacek 11y ago

Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. My understanding was that it's mostly the opposite, that MMs profit from uninformed order flow (so much so that they'll buy access to it from brokerages), and that informed traders were their predators in the market food chain. At any rate: cost of trading has by every account I can find plummeted since the introduction of automatic trading. As recently as the 1990s, spreads were quoted in eighths of dollars, and there was widespread collusion to fix prices at quarters. In 70s and before, the markets were worse; basically organized fleecing operations.

mrchicity 11y ago
Yes I mean if I think the fair price of a stock is $100, and I knew who I was trading with, I might bid 99.99 offer 100.01 to a retail trader, but bid 99.95 offer 100.05 to a bank or hedge fund. The retail trader probably doesn't have short-term info and he's not going to keep trading in the same direction so I don't need to make as much spread. On exchange markets you can't really tell who you trade with so you have to guess.