On the topic of manipulation, go to Reminiscences of a Stock Operator, it has a full chapter on "how to manipulate a stock"... Manipulation is still done in a similar way as back in Livermore's days... just that you go to prison for doing that now a days...
Yeah we are market takers on the future, so hedging done with the future is always a loss. The spreads in options are far higher than spreads on futures though. By the way, I think that the type of manipulation that Livermore talked about in his book (cornering the market and such) is close to impossible to do these days. Recent (legal) high profile cases of market manipulation were the short squeezes that took place in Volkswagen and Antal. I trade in Europe so they are the best examples I can give, a bit of research on Google it should be easy to find out more about what caused the movement.
So how does a market maker hedge differently than what a retail trader can do? Like it is indicated before, I suppose because of lower hedging costs, this is how a market maker can make money and not just because of the bid/ask spread. I read somewhere that about 90 percent of market makers make money and 90 percent of retail traders lose money. Ignoring the exactness of the numbers, I assume this is one of the reasons why people accuse market makers of manipulation and ripping off retail traders... Regarding market manipulation, you usually hear about short manipulation. What about long manipulation? Is it harder to manipulate a market upwards? I mean I am not looking to manipulate the market with my puny resources, but I would like to know how I am thrashed about by this. The Market Maker's Edge by Josh Lukeman. I read in an amazon review that this book didn't really talk much about market making techniques, but then again, sometimes amazon reviews are untrustworthy.
A market maker puts in bids/offers. It depends on how big the marketmaker/firm is, as in how big their volume is. The bigger their volume, the lower their commissions/clearing fees are, the tighter they can make the spreads. The more business they get. The more they make!
In holland there's this firm that did a monster trade in options last year. There was this German stock, that went ex dividend, and there was a market maker who quoted those options as if they haven't gone ex dividend yet. This dutch firm saw this and spend the entire day buying those wrong priced options. At the end of the day, the marketmaker who quoted them wrong figured this out and had to hedge/buy back everything the next day. This dutch firm sold everything back at the open the next day and made like 200 - 250 million euros. How about that for a day's work!