Future of options market making
One thing that's certain about trading is that the game is constantly changing: the growth of electronic trading, the decline of physical exchanges and the decimalization of option prices all being recent examples.
The overall trend seems clear: smaller spreads and greater reliance on option pricing models. But, as of 2012, humans are still a huge part of the equation at most of the large options market makers. Almost all of the market makers rely on traders to interpret trading activity and adjust the parameters their models use to price options. While models are critical, and have certainly enabled firms to consolidate option books and employ fewer traders, few (if any) of the major players have gone completely algorithmic.
But speaking to some traders in the industry there is definitely concern that sometime in the not-so-distant future options market makers will go the way of market makers in underlying products, with everything but large block orders done without human intervention.
What is your opinion? Will options market makers fully computerize in 5 years? 10? 20? Or do you just not see it happening?
Nassim Taleb sees market making as a 'robust' function in Finance. While you won't be making boatloads during extremely good times, you won't blow up during bad times.
Interesting question. I couldn't tell you why options market making firms use traders for the function that you mentioned. The market maker I worked at employed that exact business model but I would argue that some (Allston, Getco, Jump, etc.) have already begun to do this. Granted, they don't only trade options markets but the "traders" there serve more as developers and create hf strategies more so than just adjusting the model to reflect market dynamics (not that the job is easy, far form it). Even with high frequency futures trading (spread trading for example) it's all automatic and the traders just update models so I'm not sure there is really such a thing as fully automated trading strategies because people will always be there to monitor/update them
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plenty of trades on the floor in corn and soy options.
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