How do market makers hedge their exposure?

Discussion in 'Trading' started by Paccc, May 23, 2006.

  1. segv

    segv

    Correlations can be very high over the intermediate term in the currency markets. This works in your favor during the process of normal market making, because you capture the delta in the average variances of the components of the basket. When news hits the market, correlations increase in the short term and you find yourself building inventory on the side opposite of the move in both assets. You can hedge the worst case or the total risk with derivatives, but diversification among these highly correlated assets will probably be an insufficient hedge.

    Then again, I do not trade FX spot. As FX spot markets are not regulated exchanges, you have a higher portfolio risk (intrinsic). If you have not already, you might think about the viability of moving to FX futures and options, using the underlying and other cash spots to drive quotes. Then if you need to declare shenanigans, there will be a process you can go through. Just a thought.

    -segv
     
    #31     May 24, 2006
  2. segv

    segv

    Are you licensed to transact business with the public in these securities? I am not a lawyer, but some might construe your suggestion as "dealing", just so you know.

    -segv
     
    #32     May 24, 2006
  3. Has no one mentioned that a MM may actually lose money from time to time in an individual name?

    You think they trade 100's of stocks and never lose?
     
    #33     May 24, 2006
  4. rosy

    rosy

    the joys of the electronic market place allows the public to post the best bids and offers.
     
    #34     May 24, 2006
  5. Did you know you were quoted in the most recent issue of Stocks & Commodities? I think it was none other than Don Bright highlighted one of your posts. You go boy!:D
     
    #35     May 24, 2006