I was an AMEX option Market Maker for 12 years from 1984-1996. Market Making used to be a great way to earn a living. You are providing liquidity to the markets and trading the Bid-ASK spread. You would hold positions and trade around them during the day and most of the time make a good living. Market Making was never easy. During the 1990's many things changed including dual listing of options, shrinking Bid-Ask spreads, very expensive seat leases and competition from well capitalized market maker firms like Timber Hill, Hull Trading & Susquehanna. Being an independent market maker does not make much sense under the current system. You will have to lease a seat on an exchange (currently $8000 a month or more), pay additional floor overhead and option clearing commissions. Since there is no real edge market making(smaller bid-ask spread & dual listing) , you will have to put on positions and take alot of risk to make a good living. If you want to be a market maker for a big firm like Timber-Hill you won't get rich , but you will get a salary and a bonus that will give you a modest income with stable employment. The top traders at our firm would never become option market makers since they make more than most independent market makers on the option floors and have 1/10 the overhead. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
Gene, Your years of experience as a market maker must be paying off with your own trading...any knowledge that you have or care to share with us would be appreciated...what to watch for etc...I know most of these tips have been revealed in some form or another...but I always like to hear what someone, such as yourself who has first hand knowledge has to say...instead of getting it through the rumor mill.
I appreciate the reply. It clarifies things for me. It reinforces my own opinion: self employment is the best.
I was a market maker at the cboe from 1997-2000 with O Conner and Company. Everything that Gene wrote is exactly right and why I and many others left the floor. The market making business is now dominated by the large trading firms. Because they trade so much volume they can trade with tighter bid asked spreads which essentially hurts the smaller independent market makers. You will find a variety of backgrounds on the floor, but in general many firms look for young, competitive men that are comfortable with mathematics. The floor is a great place to learn the business but like Gene wrote profit margins are very tight now. Many market makers have gone out of business in the last year and my friends on the floor tell me it isn't getting any better. The good news is that off-floor option trading is becoming more reasonable because of the tight bid-asked spread. Hope this helps.
gene, I knew your name was familiar. I believe I met you before heading off to HK when I spent some time on the AMEX floor. Which pit were you in? ... I concur with gene on most of his points although there are certainly independent market makers making a good living. It is just much much harder than it used to be. Other things which will not hurt your chances in the pits are size (bigger is better), ability to handle pressure - i.e. being great at math is one thing, adding 5+5 is another when the walls are crumbling around you.
dagve, O'connor & Assoc. (now Swiss Bank) was one of the best market making firms to work for. They are well capitalized and have a great training program. Some of the best "locals" I have ever met were O'connor trained. O'Connor & Co., L.L.C. is still in business, but they did sell their option market making division to Swiss Bank. See their site at http://www.eoconnor.com/ . I'm sure you learned alot when you were there. Def , we may have met on the AMEX. I have been there since 1982 . I was a market maker in XMI , SPY, GLX and PFE . I worked for myself and Aspen Trading & REVCON. I did have some good times and good years on the floor. I would agree with you that some independent market makers are still making a good living. However, the business we are in as traders is "risk" vs "reward". If I have to make $200,000 dollars a year to break even (assume I work for a market making firm on a 50/50 deal), I don't think it makes much sense to work as a market maker. Our top traders earn high six figures with almost no overhead. Being the "dealer" used to be a big advantage, however under the current conditions it does not make much sense to be an independent market maker . Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net