difference between market-making and just proprietary trading?

Discussion in 'Options' started by carl1111, Feb 20, 2006.

  1. carl1111

    carl1111

    What exactly is the difference between market-making trading and just proprietary trading in options, especially concerning off-floor trading via just the screen. Obviously the market-making firms are offering a bid price to buy the option and an ask price to sell the option. How is this significantly different from a firm that is not a market-maker? They simply sell at the bid price and buy at the ask price. However, for trading options, are they really doing anything significantly different from each other? Wouldn't both firms be doing the same things to limit risks and be using the same information and research to make decisions? Can anyone explain the differences for off-floor electronic traders?
     
  2. Most MM and RMM will trade a Vol Book. Most upstairs option traders are trading direction or some spread strategy.

    MM quote around a volatility level. Buy 20 vol sell 40 vol. This quoting is done with software (Actant) and they trade 10 to 100 issues with these each issue having its own parameters.

    UpStairs traders have to come to the market as a customer or B/D is you are prop using a JBO structure.

    Biggest difference is leverage and most MM have bigger haircuts. (3 to 1 up to 6 to 1)


    There are more difference but that is a start for you.
     
  3. carl1111

    carl1111

    bump/
     
  4. WD40

    WD40

    mm don't pay commission

    in the USA, mm are required by regulation to fill the orders at the bid/ask price, even if he personally think it is a bad deal.
     
  5. Maverick74

    Maverick74

    Actually, you are wrong on both these points. MM's do pay commissions, usually a nickel a contract or so. And MM's are not required to fill orders at the NBB or the NBO. I could simply make a market a dollar wide and would never get filled. I will never get hit because I will always be outside the NBB and the NBO.
     
  6. custom85

    custom85

    I know Im new here, and no one will probably listen. But most people on this site have no clue how options trade, why they are used, and much less how to trade them. Maverick here seems to have a grasp of how it works. For those of you who dont want to listen to a new guy I was a market-makert at the CBOE so I truly do know how things trade. Options are a complex and expensive instrument to learn to trade properly.
     
  7. Opra

    Opra

    Interesting. I didn't know that. To whom do MM pay commission? The exchange? TIA
     
  8. Oh really ?
     
  9. Not true. If the price is really off the market makers will cry to the floor officials to "bust" the trade because of some lame excuse (bad quote, technology problem, fast market, the dog ate my homework, etc.).
     
  10. MTE

    MTE

    Bad deal is not the same as a bad quote. WD40 can correct me to what he/she actually meant, but I'm pretty sure the meaning is that although the market maker maybe bullish on a stock he/she still has to buy a put. (Yes, I know that market makers don't really care about the direction, so please save your comments on this example. It was just an example to demonstrate a point.)
     
    #10     Feb 21, 2006