Making A Market

[buffting]

so i was doing a trading simulation the other day - in particular it was a market making exercise and there are a few questions i would like to clear up:

if someone gives a quote of say 50-54 or whatever and no1 wants to trade on this then as a market maker is it obvious what you should change to your quote to in order to create liquidity for example. Bear in mind its just a small simulation of 15 people.

Would it depend on whether its a buyers market or a sellers market out there? so if people want to sell then you would possibly move ur quote up slightly to 51-54 right?

what if u did not know what people out there wanted - since ur a market maker you would narrow spreads maybe?

any further info on basic market making would be greatly appreciated.

 

[andanotherthing]

the ideal for a market maker is that they get hit on both sides of their price. the market is never in equilibrium where all participants are one way. if it is a quiet mkt and a mm really wants to get something going he/she could move the mkt up a tic or down a tic and so on until the predominant interest emerges. closing the spread is a no-no as this is where the mkt maker makes a living, ideally the wider the better. in current interest rate mkts for example the wider spreads have helped the mkt makers reap greater profits from mkt making than they could possibly have hoped for in the past few years. This is mkt making heaven.

 

[foredog]

If you're short and you think it's near the top you would go 49-53 hoping in folls a seller inot thinking the markets peaked, or another market maker goes with you.

If you're short and caught and you think it's going up then they are either 52-6 or 53-7 depending on how desperate you are.

You'd still keep your 4p price beacuse if you narrow your spread everyone else may and before you know it they are 50.25 - 50.5 with no margin....

 

[Rhody Trader]

As has kind of been said, the goal of the market maker is volume because units x spread = profits. As such, it behooves the MM to try to constantly keep his bid/offer right in the middle of where the market (both buyers and sellers) are most eager, on aggregate, to transact. Of course that tends to be a moving target. The good MM knows how to make those adjustments to find the volume once its started to dry up at one given price level.

 

[gooseman]

not quite that simple-obviously you have your volatility risks and the quality of your models, not to mnetion the strike risk.

 

[buffting]

thanks for the replies guys - i like the factors and especially the tactic of lowering the bid slightly to try and induce the market lower and cover your shorts. Im sure there are endless number of strategies like that. Im hoping this thread can go further and form a good discussion and learning tool for beginners - any further very basic strategies please share.

However for an interview - im sure senior traders will come up with "what would you do if this happened" scenario questions to test candidates' psycological and market making instincts lines of thought.... what would you say are the basic strategies/scenarios that you would expect us to have an understanding of at least?

hope that makes sense? further interview tips very welcome.

 

[covered_call]

thanks for the replies guys - i like the factors and especially the tactic of lowering the bid slightly to try and induce the market lower and cover your shorts. Im sure there are endless number of strategies like that. Im hoping this thread can go further and form a good discussion and learning tool for beginners - any further very basic strategies please share.

However for an interview - im sure senior traders will come up with "what would you do if this happened" scenario questions to test candidates' psycological and market making instincts lines of thought.... what would you say are the basic strategies/scenarios that you would expect us to have an understanding of at least?

hope that makes sense? further interview tips very welcome.

Keep in mind that market making is essentially scalping. MM's can't afford to maintain too hefty of a position as they never know when they may get jammed with considerably more contacts than they wish. Many market makers (particularly those employed by the exchanges) are required to mark markets with 'x' number of contracts at all times. Risk management is always the best answer in these interviews and eventual positions. Know how to manage your risk, take the loss, forget about it, and move on.

 

[gooseman]

all about risk. nail head.

 

[gooseman]

Iceman: You can be my wingman any time.
Maverick: Bull****! You can be mine.

 

[buffting]

and in terms of risk managing - is it fair to say mm's generally want to stay as flat as possible and go home at the end of day with no risk right....

What kinda systems and risk management techniques do market makers use? For example if market making for standard fixed income instruments like the 3m Euribor or euro-bobl, euro-schatz?

thanks

 

[buffting]

couple more questions popping into my mind as I prep for this interview:

Whats moving the euro-bobl/schatz and euribor markets in general on a daily basis? Is it basically the supply and demand from the major institutions? and then obviously the economic data.

i work in the swaps market and two months ago when trichet said that the following months interest rates will increase for sure and the swaps market went mad. The CMS swaps spreads reversed and it was a mess - can anyone give some insight into what happened in the bobl, schatz markets from market maker's point of view? etc...

 

[gooseman]

when the yield curve turned over the bund vol went absolutely mad. check out the charts for that day. rumour has it a few desks needed to hedge their gamma for the non-inversion notes and simply had to buyy the bund. date was 9th june.

as you say it is the usual drivers for any market-macro news and flow.

 

[buffting]

yes the vols went sky high and the yields on the schatz-bobl plummeted. If you were market making these FI instruments - what are you doing in those instances?

if you were long these futures then you would have been f**ked right? and a sensible trader would be trying to close out the position as quick a possible and take the loss - then start making a market at the new yields? what other issues would be facing a market maker for these futures be facing?
thx

 

[buffting]

who liquid capital's main competition?

and the large market makers in the schatz, bobl and bund?

 

[Directional]

remember a market maker in the outrights is not necessarily just going straight long or short if someone take his price. A bund market maker could offset or quote his exposure into the calendar spread or the back month, he doesnt just have to make his tick from the spread between the bid/ask in the front month. Its possible to make ticks only ever quoting one side of the spread.

example: MM making a bid in bund FGBLU8 front month, if he gets hit, can also either pay up or make an offer in the spread and an offer in the FGBLZ8 back month to close the trade out without having to take a directional position in the market

 

[buffting]

So for all you working in market making or looking to be market makers...

why do you choose market making as opposed to being a trader at an ibank???

 

[buffting]

yeah i guess in a way they are market makers for institutional clients of an ibank in that sense.

But more comparing a market maker at IMC or liquid with a futures trader at an Ibank (not prop).