Here's a good article for those entering/entry level in trading.
http://www.fimarkets.com/pagesen/trader-job.php
Also, I know this got posted earlier this week but for anyone who missed it:
http://www.traders-library.com/
Pretty much every essential book on trading in PDF form.
Thanks, missed that last site
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Fantastic article on the first link, thank you very much for that post! I have a quasi-interview for junior role this week and this article was a great read prior.
I had read so many articles about trading, this is kinda familiar from what I read.
Great site! http://www.traders-library.com/
Not to sound so noobish but can someone explain exactly how market makers make a profit in like 2 sentences that doesn't involve any sort of speculation? Is it just buy at one price and sell a second later at a slightly higher price?
Doesnt really happen like that, in derivs its more buy below fair value and sell above and in the long run make the edge. Lot of warehousing and managing risks. Basically you provide liquidity and try to get paid for it.
As Derivs alluded to above, the market maker will cover risk as "defined" by the product they trade. Derivatives, being less liquid, are held for a longer time period and thus you do not cover your risk quite as quickly. FX (spot), for example, you cover risk almost immediately. The market is liquid enough that you can do so.
To answer your original question, think of the bid-ask. MM's buy at the bid and sell at the ask (buy low, sell high). Thus, in the FX market, the market maker can usually profit from the spread of buying from the client at a lower price and then covering at a higher price by selling it to the market. This is a simplified example and is much more complicated for more complicated products. Furthermore, the market can move very fast and you will be buying at a price that will soon be lower than what you can sell at (aka you lose money).
Hope that helps.
when you add liquidity in the market (equities) you make money. you do no necessarily have to pay to take liquidity out though. Now imagine this being done millions of times a day and executed without error, thats blackbox trading. They call it "market making" because it makes for a much more fluid market, but there are obvious problems with it (ie Flash Crash, mini-crashes in individual stocks, etc.)
Thanks for the responses! Follow up question then: what incentive (if any) does a MM have to provide liquidity to a stock that is being hit? Thus shouldn't there be some aspect of speculation in that the MM should only want to provide liquidity to stocks (for equity traders) that are going up in price?
You are providing a service to your clients to be there in the market regardless of what is going on. Stocks are usually liquid enough that even if you wanted to, as a MM, make a wide bid/ask, you really can't because the client knows what the market should be at. In general, the MM comes out ahead because of the bid/ask spread, but there are times when the market will move against him or her and they will lose money. You take the good and the bad and keep moving ahead.
Edit: to be clear, this is stuff I learned from over the summer as an intern. I start FT this summer. Take what I say with a grain of salt..
hey quaneaser,
as a market-maker, you are always buying low and selling high. you are right that you would not want to show a bid for a stock that is being hit, but what choice do you have-the bank pays you to do that.
of course, you will lose money quite often, however the simple fact that you get on the bid and lose on the offer means that in general you make money.
koho is right-if you show too wide, the client just goes elsewhere. that happens a lot in fx vol trading, for example.
FTFY haha.
Also, from that comment, what is your experience with FX vol trading?
ha nice job there revsly...never actually happens does it
i'm an fx vol (g10) junior trader at a bb. pvt me for more?
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