Intraday pricing models for underlying products or stocks

Discussion in 'Trading' started by fatrat, Mar 22, 2008.

  1. fatrat

    fatrat

    I've been exposed to quite a few option pricing models and the ideas of clustered volatility, but I'm having a tough time understanding how market-makers quote both sides in the underlying -- basically stocks.

    Is it mostly a statistical relationship? I.e., regression / factor analysis and adjusting prices throughout the day? How do these guys make any money without front-running or knowing the orderflow well in advance? GARCH all over again, but requoting non-stop and offering liquidity? If the MM gets hit hard in a stock, is there going to be a corresponding hedge thrown out in the options market?

    Someone help me put these pieces together, because I am totally intrigued by the mathematics of market making an underlying product.