Market makers Edge.(explaination needed)

Discussion in 'Trading' started by Nana Trader, Mar 19, 2003.

  1. Hi,

    I have writen text page 211 from "market makers edge" book
    I do not understand it , therfore i appericiate if you can explain
    better in "more simple language".

    The market makers who specialize in institutional order flow
    put up initial risk capital in order to get the order in the door.
    If a stock is quoted 50 - 50 1/8 , and an institution calls an
    institutional market maker with 100,000 shares to buy,
    the market maker would normally sell that account at least
    25,000 shares at 50 1/8 in order to work the rest of the order.
    this means that the market maker is at risk on the first print,
    or in now short 25,000 shares. If the stock moves in his favour
    after this print , he will make money, if it moves aganist him, he will lose money. If the stock is liquid the market maker would likely
    sell the institution the entire 100,000 shares ar 50 1/8.

    In our example , if the market maker sold an institution 25,000
    shares at 50 1/8 to work shares behind it, the market maker
    now has the objective of eliminating risk. In order to eliminate risk
    , the market maker wants to buy back stock for a small profit, flat, or for a small loss. Once he eliminates his risk, his objecttive is to trade the remaining 75,000 shars for the bid-ask spread of 1/16 or 1/8 of a point. If he buys back 12,500 shars at 50 1/16 and
    12,500 shars aaaaaat 50 1/8, he is now free to praticipate with volume at zero risk in order to trdae the rest of the order for a profit.
    The market maker may do this by sitting on the 50 1/8 bid and buying stock there, and then selling it to the at 50 3/16 or 50 1/4.


    I need you to explain step by steps like whethere market maker
    first buys or first short (if he clicked ask or bid and what next?

    I know it is not kind of specific question that i am asking
    I apologize for it.