Can someone explain how a specialist hedges against losses. For example, FRE has had a tremendous volume increase....while the stock is going down bigtime. I assume the specialist is sitting on a ton of shares that they had to buy. How is he hedging against the constant selling? Thanks, Kev
Actually, they generally don't hedge with options, and typically just have to eat huge losses in big moves. They will then hold the shares and try and get rid of them on the (hopefully) way back up. That's why it is really good to be a specialist 99% of the time, and really expensive the other 1%. It's also why a lot of the small specialist firms no longer exist, and have been taken over or merged. Providing the liquidity to enable everyone to get out of a position anytime, even during the 1% when you wouldn't want to be the specialist for anything, is what you pay for the other 99% of the time when you give up the spread. Jessie