difference between market-making and just proprietary trading?

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

  1. Maverick74

    Maverick74

    There is a lot of misinformation on this thread. There is a huge difference between a MM honoring a market HE MADE, and forcing him to take a trade. No MM is forced to take a trade.

    Example: Stock XYZ, the April 50 calls are 1.30 bid at 1.40 offer. My market might be 1.20 bid at 1.50 offer. I am not forced to buy anything at 1.30 or sell anything at 1.40. If the 1.30 bid is taken out and I do not update my market and I'm the next bid at 1.20, I will be forced to trade the minimum, usually a 10 lot, at that price.

    Since most option markets are auto-quoted now, if the 1.30 bid goes, my software will move me down to 1.10 bid now and will keep dropping my bid if I choose to stay off the market. No one is forcing me to do anything. MM's are only required to honor the markets THEY make, not what other people make.
     
    #11     Feb 22, 2006
  2. Maverick74

    Maverick74

    This rarely happens. These markets are being auto-quoted by bots now. If the underlying price makes a large move, most MM's software will pull them off the market. This is done very quickly and efficiently. For example, in the auto-quoting software we use, we have a feature that will pull all our quotes if the underlying moves a certain amount quickly, say .20. This keeps us from being picked off in case there is a sudden gap in the stock.
     
    #12     Feb 22, 2006
  3. Maverick74

    Maverick74

    They pay their clearing firm, Goldman, First Options, Pax, etc.
     
    #13     Feb 22, 2006
  4. are they?
    didn't know that...thanks for the priceless insight, was waiting for decades to come across such an informative post.
    thanks again
     
    #14     Feb 22, 2006
  5. Verdais

    Verdais

    Don't know about the US, but on Eurex MMs also pay the exchange, but at a significant discount if the market-making requirement is met. The requirement is that a certain percentage of quotes must be responded to. There is no obligation to trade someone's bid or offer, but if they hit yours... then you obviously have to take it because you're filled.
     
    #15     Feb 22, 2006
  6. Maverick74

    Maverick74

    Yes, same here. MM's are required to post a market a certain percentage of the time. But my posted market could be very wide. In fact, the exchanges in this country only require you to be within $5 of the current market. Example:

    The Dec 50 calls are 6.50 bid at 6.70 offer. The widest market I am allowed to make is 4.00 bid at 9.00 offer. Obviously I will never get hit on these prices. The reason I would set the market this wide is because I have no interest in trading anything at this strike or this month, or maybe even the stock. So I post a market. Yet, I need not to worry about getting filled at these prices.
     
    #16     Feb 22, 2006
  7. MTE

    MTE

    That's what I meant. I should had been more clear.
    Thanks Maverick!
     
    #17     Feb 22, 2006
  8. proption

    proption

    Not sure whether the original question was after such an answer, but I'll dip my toe in anyway.

    On a different note, I would say the key difference between a price-maker (market maker (MM)) and price-taker (prop trader(PT)) is that the MM has order flow and benefits from the bid ask spread - a natural edge, whereas a PT has no 'natural edge'.

    Furthermore a MM would seek to lay off risk, whereas a PT seeks to take on (attractive) risk.
     
    #18     Feb 22, 2006
  9. If a retail trader has direct market access, does a MM really have any significant advantage over the retail trader ?

    Ok, a retail trader has to pay broker comms, but a MM has overheads such as office rent, staff costs etc, etc.

    Where exactly is the MM's edge ?
     
    #19     Mar 5, 2006
  10. MTE

    MTE

    Buying on the bid, selling on the ask, quoting a two-sided market.
     
    #20     Mar 6, 2006