Hedging client positions

[Schopen]

When a MM hedges client positions and the positions realise a loss, does the client still realise a loss or does the MM hand over the hedge profit? Anybody know? Any markets, just in general.

 

[TheBramble]

Lol

edit: just in case you weren't joking...

How does a MM make a loss? They match buy/sell orders thus providing liquidity. They will manipulate the spread to 'encourage' a largely flat order book. Any directional bias they may choose to take is unlikely to be hedged for the simple reason they have taken a bias and expect to profit from that bias. Any unwanted bias or exposure they may decide to hedge through synthetics, but regardless of their end position, you, the client, win or lose quite independently of their endeavours and outcomes.

However, what do I know? Next time you take a loss, ask your MM if they'd be willing to say just do a profit split with you on your bit...

 

[GammaJammer]

you are kidding right?

 

[Skill Leverage]

Yes Schopen, you are correct, a MM's purpose is to make sure that all retail traders profit from every trade.

One born every minute

 

[Technically Fundamental]

I'm trying to decipher a jumbled question here but I can't jump the first hurdle of the client never losing.

 

[Schopen]

Corporate clients not just retail. I'm trying to understand banking better. I'm reading a book and it says :

'A Market Maker will wish to hedge positions arising out of client business, when they are unsure when the resulting bond positions will be unwound.'
...
'The Market Maker will want to hedge against a drop in value of positions during the time the bonds are held.'

This is hedging bonds with futures. I am not sure why a MM would want to hedge this as it doesn't seem like his/her problem..?

I guess if the hedge was good, and handed over with the P&L on the position, the client would never win either.

 

[PualoP]

The MM will want to hedge because they take the other side of the trade. If the client buys then the MM will be short and vice versa.

 

[Skill Leverage]

Come on mate, this is stupidly easy. The MM is acting as a counterparty to the trade his client wishes to execute; he/she will try to make money on whatever the client leaves to work behind the initial order, any 'hedging' that takes place is just the MM fulfilling the order, it's not an insurance policy for the client in case their trade doesn't work out - the client would effectively have a flat position in this instance, which would kind of render the whole process useless.

I think you need to go back to the very basics before you worry about hedging etc.

 

[Schopen]

So does a MM have to load up on the instruments/positions being asked of it?

I'm trying to see what's different to:

a) client hands money to broker
b) broker uses client money, goes into market and purchases instruments/creates clients position
c) client gains/loses on the trade
d) client closes position
e) broker makes on the spread, but isn't affected by gains/losses on position, because it's not their money.

Is this due to a fundamental difference between brokers (assuming my description is correct) and MMs?

 

[Skill Leverage]

You're completely mixing up the roles of a broker and a fund manager there. A broker is (usually) just a guy on the phone who you call up and say 'buy me this at this', he has a trader execute the trade, and takes a commission. They can and do offer clients advice, but they will not take a trade on a client's behalf without their express order to do so. A fund manager is someone you give your money to, they trade it on your behalf subject to a performance fee/profit share.

If a MM wants to be short, I don't know, Microsoft, he will let people know via various channels, then the following conversation occurs:

'John, I see you're showing 25,000 shares MSFT at blah blah... I'm a buyer of the 25,000, with another 100,000 behind to work.'

The MM is consequently now short 25,000 shares ie he has put up risk capital on behalf of his client; he must try to offload for as little loss as possible (although sometimes if he's lucky he will be able to profit) - he then has the other 100k to 'work', meaning that if he can buy back the first 25k shares without taking a loss, he can earn the spread on the remaining 100k, with no risk to himself.

You have completely tangled up all your knowledge my friend.

 

[GammaJammer]

At what point did anyone start talking about fund managers? OP not the only one getting tangled SL.

 

[Skill Leverage]

a) client hands money to broker
b) broker uses client money, goes into market and purchases instruments...

I don't know of any brokers who operate this way. I know a fair few fund managers who do though.

 

[TheBramble]

This...is what keeps bringing me back.

You just don't get this in real life....

 

[TheBramble]

a) client hands money to broker
b) broker uses client money, goes into market and purchases instruments...

I don't know of any brokers who operate this way. I know a fair few fund managers who do though.

I'm not sure who's winding who up now.

 

[Skill Leverage]

GJ maybe I read the post a little quickly, upon re-reading I think maybe he was referring to a broker, but asking 'what's the difference between a broker and a MM' is a bit like asking 'what's the difference between milk and eggs?'

 

[GammaJammer]

This...is what keeps bringing me back.

You just don't get this in real life....

This is why I'm posting less and less these days...

 

[Technically Fundamental]

Dont brokerage firms have mms and traders working for them?

Well if they have trading desks.

 

[Skill Leverage]

I'm not sure who's winding who up now.

I'm actually not trying to wind anyone up. Step a) is incorrect, as is b) in part if we're being pedantic. I think I may have read the first two a little quickly and made an assumption, but to be honest it's a fairly minor point in the context of what the guy is asking, no?

 

[GammaJammer]

GJ maybe I read the post a little quickly, upon re-reading I think maybe he was referring to a broker, but asking 'what's the difference between a broker and a MM' is a bit like asking 'what's the difference between milk and eggs?'

It might be to you Mr first job know it all, but maybe not to someone not working at any sort of a firm. Granted it was a rather simplistic question, but I don't think your response was warranted.

 

[Skill Leverage]

Dont brokerage firms have mms and traders working for them?

Well if they have trading desks.

PC World have salesmen and technicians working for them, but asking what the difference between the two jobs was would be a stupid question.