Market Making Logic

Discussion in 'Order Execution' started by 76132, Dec 9, 2011.

  1. 76132


    I'll probably never know the answer and there are probably a multitude of reasons, but I was wondering if you guys can give me a few possible answers.

    I just sold something that had low volume, which meant that the spread was pretty wide. Right after I sold it, the MM (I presume it's the MM), decreased the spread. He did this by increasing the bid price but keeping the ask price constant.

    I feel like a sucker because I 'could' have sold it for more, but who cares, I sold it at the price I wanted to.

    So why would he increase the bid price? I'd expect him to maybe lower the ask price a little so he can close out the position. I'd also expect him to lower the bid price so he'd buy less of the asset, since it is illiquid.

    The only reason would be he actually wants to buy more of it. But he's kept it at the spread pretty wide for a while. I've been watching it and hoping he'd raise the bid so I could sell it for more, but it didn't happen.

    Perhaps he wants to buy it a cheaper price. But I don't think that's the case because why would he raise the price since he got a fill at the current bid? And furthermore, I also bought from him and right after I bought, he decreased the ask price. Huh? If he wanted the asset, wouldn't he raise the ask price or keep it the same as it was? (Note: I didn't buy/sell the same asset. They were 2 options with different expirations).

    Maybe a faulty trading platform is at work, since I don't think any big firm would make markets on an illiquid asset. Because why would you buy something for more if you got a fill at a lower price, and why would you sell something for less if you got a fill at a higher price? All that means is if I trade with him again, I'll just split up my order and gain a slight edge.

    Any possible explanations?
  2. newwurldmn


    The spread is probably wide enough for him to make money and he thinks there might be more behind your order and he's trying to entice this order out.

    It's also possible that you hit his bid at a bad time - when he had widend his quote for some reason.

    Just my guess.
  3. Focus on trading your system instead of individual trades. :cool:
  4. rosy2


    that looks right to me. or maybe he's net short and just wants out. or maybe you found a logic error that can be exploited. What's the ticker? :D
  5. How do you know that the only two parties following the instrument are you and the party who bought your stock? How do you know that the bid wasn't raised by a third party that has its own separate reasons for doing so?
  6. bone

    bone ET Sponsor

    Yup. Assuming way too much, IMO.