Why market making? What's so cool about it?
Personally, I think market making is much more exciting than just directional trading or speculating. It involves much more risk management, which to me is more challenging and interesting.
What are some other reasons as to why you'd do market making over just directional trading or speculating?
You don't always have to be directionally (spot/vol/otherwise) correct to make money.
Customer/franchise liquid market trading is not ideal for many really talented guys I know.
-You get hit in falling markets and lifted in rising markets.
-You are required to post liquidity.
-Your risk manager owns your position limits regardless of opportunity.
-You have limited analytical support.
The best ones leave for buyside (HF, MF, RIA, prop) and the rest kind of all wish the same exit opps.
lawl wut? There are insanely talented guys that only make markets.... Do you think GETCO, Jump, DRW, etc. are relying on speculative positions to make their money? The largest chunk of their business comes from market-making, period. The same can be said for most trading desks @ BBs.
Jerome - it doesn't matter that there are a great deal of talented market makers. You missed the point entirely.
I guess some ppl like being the buyside's go to guy for execution. You are the bookie, the dealer, you make the market blah blah. Socially you will be out with clients a lot, going out as a group w/ your desk w/ a buyside PM and his team, flexing your expense account @ high quality spots. You're right - you learn a bunch about risk management but it's a double edged sword as risk can shoot down high conviction trades for bad reasons
To be fair I don't know what equity side is like, but the life of a Fixed Income trader is nothing like that. We're not execution traders, for one. We don't (or rarely do) go out to entertain custies, that's what sales is for. On the contrary, we get taken out and entertained by our brokers. Furthermore, I've never had a problem with risk management, usually they don't care unless you're blowing through V@R limits (which that's your own fault, on the buy-side you're constrained by margin/collateral anyway) and often it doesn't take too much for a trader to explain to them why they are mistaken. Finally, I don't know of a desk that doesn't have a prop book, especially in this type of market climate.
Market making is exciting and it is also a zero sum game. This will require a special kind of personality where what you hunt and kill is out of someone else's pocket and vise versa. A good market maker doesn't care about market direction because you set the price and liquidity. Most market makers offset their positions to the open markets at better prices than what they execute client flows.
Market Making Skills Transferrable? (Originally Posted: 02/13/2013)
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My desk does a blend of MM in the really big liquid products (FI) and also intra-exchange arb'ing (commodities, prop); even so i definitely wouldn't pigeon-hole myself in thinking ill be doing this all my life while in finance. Sure, one's skills will consist of trading, mm and execution, but there's no reason you can't lateral into something else as long as the will and knowledge for that product is shown.
If you mean go somewhere else completely different, as in sales, might be a tad harder, but again key is not to rule out anything if you later realize you want a more client-facing role and not staring at your screens for 12 hours of the day.
Advantages of a market making seat v prop seat (Originally Posted: 04/10/2015)
A question I've had that I'd like to get thoughts on. Lets take the rates market as an example. To be in a position which allows you to express views via a variety of different products (ED, swaps, agencies, rates vol, etc) seems like an amazing seat. However, to go straight into a seat like this without any sort of experience, namely that which you can gain on a market making seat seems like it comes w/ a massive disadvantage. Namely, in a trillion dollar market, you know nothing about the intricacies or the microstructures of how these different products trade; who the big players are, how they typically trade/act, etc. Moreover, it seems as if a young person may lack in his arsenal of tools i.e. we might have an idea, but how do we go about expressing that idea? What is the best way to do so? What are the different ways of structuring that idea (for example, one way to play for a grind higher in equity markets delta neutral is short vol short stocks).
Net net, do you think gunning for a pure risk taking desk early on is worth missing out on the things described above, which lets assume you can gain on a more market making desk?
Maybe if you're working for a bank, but that has nothing to do with what prop market makers are doing. No clients, not anything resembling a bookie, never out with clients, no expense accounts, etc. No relevance at all to what you just said really.
I didn't know a direct opportunity like that would be offered unless you came in with some sort of a unique background. In the physical energy business for example, you essentially ALWAYS start in some sort of an operations role like scheduling and traffic rather than straight into a crude oil or natgas trading slot.
Market making is a good gig because:
-You have an edge (bid-ask). -You learn how to handle situations: unlike a PM/buyside who can choose not to bat, you will generally be in the market. This will teach you how to trade out of a position. -Its generally faster so you develop a faster decision making loop. -You get to observe client flows helping you take a directional position (very key). -You learn about the microstructure of a market. This way when you are on the buyside you know when you getting crappy fills/bad deals/conned. -Generally, staring at a market 10hrs a day 5 days a week for a few years and constantly having to make decisions in this climate is great training for the eventual move to the buyside.
Many of these qualities are important for the buyside as well which is why you see market makers jump ship.
Why market making? (Originally Posted: 06/02/2010)
Why do so many people who enter the business choose market making over speculative / alpha trading? When you look at the number of "prop firms" out there, most of them are geared toward MM. Is there a reason for this (i.e. most people believe in EMH so they feel it is better to go for a guaranteed edge as MM's have)? My questions:
is there a max amount (bonus) that can be earned by an individual ?
is this a tougher area to break into vs prop trading?
can one develop a "track record" to use for possible hedge fund later on.
thank you.
Revsly's answers are correct.
Most people go into market making (FYI, MM means Middle Market or Millions if its with a number) because it is a great way to develop contacts and learn how the markets work. There are a lot of prop shops, but not many are reputable/have resources to train new hires (i.e. are geared for experienced market makers). Also, academics with no real world experience believe in efficient market theory, people in the real world know better...
I think market making firms is a great business to be in.....its all about volume and volatility. At the end of the day market making firms are loosing ground(due to markets getting thinner, quoting nickel to penny wide and less). Because of that Market makers look to go prop at some point.
If you ask me MM are not traders...they just want to quote markets...many times the system is on "auto pilot" and the "trader" does not even have to think...
That's definitely not true.
What markets do you all trade...sorry for persuming... I concentrate on equity options which is all algo. Set a few parameters and the program handles the rest.
FX Options, but I've seen most products in Rates & Structured Products. Are you talking Single Name options? I don't know much about those, I suppose it's different since its all listed. Even FX Vanillas are not autopilot by any means (at least in my experiences), but I do know the equity exotics side is not far off from FX exotics... so I'm guessing you're involved with single stock/listed?
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