Man, I wish I could be an OTC market maker and buy order flow. Like shooting ducks in a barrel. http://premarketinfo.com/2012/07/19/otc-market-maker-pockets-8500-off-institutional-error/
something similar, but in smaller increments and much larger scale happens every second..cause there is no REAL liquidity. its' all fake. and this is the cause of the flash crash. and money in flash crash aren't just "evaporated wealth" as media report it. someone did pocket those 'losses' in exact same way(with maybe some variations of it) as it was described in your link above. and like i said many times-this is exactly why WS will do do just fine without any retail traders. cause it's their ultimate goal-less liquidity\participants-more money for them made as it was described above. at expense of tax payer,who must do something with his retirement money,invested via that 'institution' ,which was raped in example above. and you what? no one actually care about it. WS guy on one side and money manager on another. they both got paid. one-via this trade,another-by his 'management fees'..they both paid..by YOU. beautiful scheme, and like George Carlin said-it's a big club and you ain't in it.. http://www.youtube.com/watch?v=acLW1vFO-2Q
If it had turned out there was bad news about the company and the order was not a fat-finger then the MM would have been sitting on 4600 shares as the stock continued to drop. They didn't know in advance that a buy order for the same number of shares would be coming in a few minutes. Seems like they got paid for taking risk so it wasn't exactly "free money"
Two things: 1) Market making always involves some aspect of risk. But when you can always take the back end of an order, you will have a huge edge in the long run, which will more than make up for any adverse selection on any one specific trade. 2) OTC market makers buy RETAIL order flow. They know that most retail orders are typically uninformed. If that order had come from an HFT firm on an exchange, the market maker probably wouldn't have touched it. Know who you're trading against.