Dude, you know not what you speak. I started out trading as a market maker. Market makers have absolutely no interest in moving the market - that would make them speculators by definition and defeat the purpose of collecting the bid/ask spread. Consistently collecting a DECENT bid/ask spread has a much better risk/reward skew than speculating on direction. Try it some time.
Gosh, this topic is heating up. You're exactly right that one big part of MM's role, and even by definition the "market making" role is that of collecting the Bid/Ask spread. This shows me you know what you're talking about. However, the same entity who has this "market making" role is also trading. Effectively the Market Maker is saying " I'll take on all comers in this market, and I'll make money". In doing so, "spread transactions" are the base of the pyramid, so to speak, in MM's steady income. Billy buys 100, and Sally sells 99. MM makes the spread, and doesn't care whether Billy bought to go long, or bought to cover; nor does MM care whether Sally sold to get short, or sold to exit a long position. MM has "inventory" by virtual of providing liquidity. That inventory needs to be maintained as some neutral point. MM cannot buy (from sellers) forever, nor sell (to buyers) forever. So MM's fundamental behavior is to control "risk" and to keep inventory balanced in the short term. But nothing stops MM from allowing inventory to become significantly imbalanced over time. So with a market full of sellers, MM is forced to Buy. This accumulation over time can be significant. MM would then be motivated to lift the market. MM's "income" is from two basic sources: 1) Bid/Ask Spread controlled transactions (always makes the spread) which is the definition of Market Maker, steady income from dominating the Book, and 2) what I would call "Positions" against the rest of market participants which is the "trader aspect" of the MM entity's behavior. These positions are then later liquidated as MM swings from relatively "long" to relatively "short" over time. Anyway, significant financial resources are required to move a market, but MM usually doesn't need to move more than a few ticks and that "price elasticity" is likely to be there. So MM has "running profits" which accrue from "Bid/Ask spread transactions" but also develops "a position", if you like, against the rest of the market. Unless MM can move the market, she will want to avoid a significant "position" or inventory imbalance. But I think MM can easily move a market, in many of the thinner markets it's not such a stretch to see how this can be done by using financial muscle, pure and simple, which MM has in abundance.
"But nothing stops MM from allowing inventory to become significantly imbalanced over time." This is where you are missing the point. Completely. His risk manager, his own capital reserves, the margin requirements to carry that imbalance - there is every incentive for MM's NOT to accumulate an inventory imbalance. They will take the market sellers or bid only to address that imbalance, not to screw you over. But before they take the market bid or sellers, they will do everything they can to hedge the underlying risk and make themselves delta-neutral before they move that market. Correct Market-Makers are no more than well-capitalized and frequently syndicated 'bookies'. In a perfect scenario, they are buying an equal amount of bids to the offers they are selling. And like a good bookie, they will only move the betting line to attract an equal amount of betting on both sides. A 'dark' liquidity room is like the private guest rooms in strip clubs - a bit of discretion for the more well-heeled clients.
OK, this is my last comment. I think you're talking about a very small "market maker". Let's suppose that Goldman is the Market Maker. How much reserves would She have? Goldman isn't a street corner "bookie". Deep pockets make a formidable Market Maker indeed. How many hundreds of millions could that Market Maker tolerate before even beginning to sweat? And, of course, that size MM could easily move markets, wouldn't you agree? (don't answer, rhetorical question only Again, I'm off this thread, so let's let it lie there.
Exactly! Everyone knows where the stops are! You don't need any inside information for that. It's rather obvious to anyone who has been trading for a bit.
The idea that a good bookmaker is always trying to run a balanced book is a myth. A good bookmaker is trying to run a book which will make him the most money in the long run. To do this the line maker needs to ask two main questions to set the betting line. 1) what line best represents the true odds 2) What line will cause the betting action to be balanced? If 1 and 2 are the same the bookmaker will look to have a balanced book. But if they are different then the bookmaker will look to set the odds in-between 1 and 2. They will do this because this will make them more money in the long run the setting the odds at 1 or 2.
I am very interested in futures "market making" because I'm fascinated by all the prints that I see. If anyone trades large size and considers themselves a market maker in the ES or mini futures then contact me, I'm very strong at calling direction and willing to share my edges for a return in training in market making. It would also be good to know if that was completely automated now or if it was still possible for someone to do it manually or semi automated? I've been reading about market making in futures. Some market makers are scalping spreads. They will scalp long to the stronger of a calendar month and short scalp the weaker. But, yes I have wonder about this often. What size account are they trading? How do they trade? Do they keep an inventory? Of course, they have to have an inventory to sell anything. What happens when the market runs like it did last week? If they were long wouldn't they be "out of inventory" then shouldn't it go lower or they were short they'd certainly be broke now. This is why I think reading about Don Miller technique.. He basically averages into his trades, it sounds like then tries to scalp for a small profit. I mean it sounds like to me a terrible way to trade. Because I mean he claims he's a liquidity provider/market maker/etc but I think most of those guys are staying relatively market neutral or using high frequency and only exposed to the market for a few minutes. But, I've also heard that there are no "real" market neutral traders. That everyone is exposed directionally. So I've heard both stories. I certainly believe that one has to take some sort of bet. No free lunch. But then I think there are also structural advantages or edges that do give the larger players "house edge".
Everything you write above is completely correct of course. You are making a stellar effort but you are trying to make water run uphill. They don't want to hear it. Recent example - the abuse I took when I had the audacity to suggest that a novice trader who puts up losses every other day taking flat price directional risk in the oil futures market ought to stop trading live until he knew what he was doing. His strategy is fatally flawed, but he would rather listen to the losers tempting him to carry on guessing with breakouts and moving averages. Is there really a need to purchase order flow data when the actions of fools are so consistently predictable? I know where the stops will be placed and I don't have a special data feed.