HMy main focus has been M&A so I'm not too familiar with trading other than one semester of a trading class in school. Have an interview with a top market making firm this week and trying to grasp the basics.
https://www.wallstreetoasis.com/forums/interview-…
Searched through this thread and others. Could anyone briefly explain the basics of it or point me in the right direction? For example what doesn't it mean to get lifted when you provide a range
bump
if a "market" is 12/13, it means that the "best bid" is 12, and the "best offer" is 13 (best = "most aggressive right now"). There will normally be other people bidding below the best bid, so in this case, that would be 11, 10, 9, etc...and there would be people offering above the best offer (14, 15, 16, etc...).
So, the "market maker" is bidding 12, and offering 13. If a 3rd party walks up and wants to buy, they can "aggressively" buy at 13 (this would be to "lift the 13 offer"...which means to "buy aggressively"...or they can sell aggressively at 12 (that would be hitting the 12 bid). Sometimes the "offer" is also called the "ask"...but the bid is always the bid.
why would you be aggressive? why not join the market maker and passively bid or offer and save yourself some money? Well, if you think the market price is about to take off, then you might surmise that you must be aggressive before the market moves in your favor. The market maker however feels they don't know what will happen...so they try to match buyers and sellers...and they try to make the bid/ask spread in the process. Sometimes they offer 13, get lifted, and the markets next price is 14/15. In that case, the market maker will lose money, and the aggressive buyer will win. However, if the buyer lifts the 13 offer, and then the market goes 10/11, then the market maker will make money, and the aggressive buyer will lose money.
If you ask "how do i know what will happen to the market after buying or selling?" well that is the age old question...and people fight tooth and nail to figure that out...generally being correct 50% of the time. good luck.
Interested in market making (Originally Posted: 11/12/2017)
I'm currently a PE analyst but lately Iv been very interested in market making/prop trading and would greatly appreciate the opportunity to discuss the industry and its future. Whats the average day like and how I would I go about breaking into the industry ?
Hi slippy777, any of these topics helpful:
More suggestions...
I hope those threads give you a bit more insight.
there are 2 basic kinds of "market making" 1) algo 2) large block trading
lots of the prop market making firms you probably hear and read about are algo market makers (this includes options as well as the more intensive HFT equity strategies, and also the futures/ETF/cash arb strategies)...and they are mostly trading lots of small lots...trying to make the bid/offer spread
however, the original definition of a market maker was somebody who makes a market for large blocks, generally to the large institutional players, and these came into vogue when trading volumes increased and the bid/offer spread was still fairly wide (those wide spreads no longer exist).
the skillsets for these 2 types of market makers are completely different...and there generally is little to no crossover. trading large blocks is not a quantitative thing...its more about taking a larger prop view all the time, sometimes trying to bully the market, taking huge amounts of risk. These are the "titans" of wall street...because there are very few of them...and the good ones make ungodly sums of money. Think one guy (usually in the late 30's to 40's) making hundreds of millions....i've seen up to a billion on rates and rate options/vol desks that trade very large blocks...think trades in clip sizes of a billion dollars notional. This volume has decreased over the past few years tho because of QE.
however, the algo market makers tend to make money more consistently...and on a whole, the algos make more money...but generally not as concentrated as the big boy market makers at the BBs.
Since you need years of experience before any institution will allow you the risk needed to traded the large block trades...this is essentially what junior traders at the BBs on flow desks learn over a period of many years while doing other stuff (very few ever actually get to that level...the ones who do are "famous" within their very small community).
However, you are probably thinking of the algo market makers...where its usually more of an engineering job than a risk taking trading job (but there are certain elements that you can't ignore...it is still trading afterall). Algo market making requires programming chops, combined with an intuitive sense of how trading and markets work....and the ability to translate that knowledge into code.
Regardless of which path yo try to go down...both require a depth of knowledge that no junior employee will be able to do. There is a learning curve...and that is why the BBs and prop firms have internships and junior roles...where they teach the skills, and see if you are capable of learning the material (lots of people who want to do this job are not actually capable...and you really only find out after being thrown into the fire and see how you perform). The interview process is designed to see if you have aptitude....but its not a perfect process, because some % of people who get hired ultimately get fired because they just are not good enough...and its very hard to find that out thru interviews.
Ok....that was long...now the hard part...how do you get your foot in the door? Its 95% summer interns that get the fulltime jobs. The internship is really a 2 month long interview.
How does the closing of the bid/ask spread affect things exactly? Im assuming it reduces the profit making ability of the market maker ?
Market making for beginners (Originally Posted: 04/20/2011)
Hi there,
as a preparation for a market making simulation I was hoping that you could help me.
You will assume the role of a market maker.You will be asked to quote bid-offer of an option when asked by a trader. As you perform trades you will need to record your transaction while at the same time keeping delta2000. Therefore it is essential that you have working knowledge of the Greeks. You get a spreadsheet of price on calls and puts in different strike and different expiration. You would either have to quote the full time traders (via phone) on bid/ask price, or call them and ask them for a price, and decide whether to trade or not.
How would you approach such a game? Anyone up for trying to make up a scenario and think about the right plays?
Can anyone explain this to me?
I will add a given scenario later, since it is a bit complex and i want to understand the basic idea first.
The only thing I would suggest: everything you do you should be able to say why you did it and it should make sense. Its harder than it sounds, but if you can do that you will do well. Read up on the greeks and some basic arbitrage between options that they will probably try to throw on you.
Then track your delta and if you are building up a delta do an opposing delta trade.
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