Optiver vs Sales and Trading

As I understand Optiver is referred to as a proprietary trading firm, but they are also a "global leader in market making". Therefore what exactly is the difference between the work you do at optiver as opposed to S&T in an investment bank since traders in S&T divisions are market makers also.

This may be a dumb question so please excuse my ignorance but I genuinely keep getting contradicting explanations about what S&T does and what difference prop shops do.

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Well Optiver mainly trade options, but to make it easier to explain I will just use stock given there is no greek there.

Traders at banks execute orders and hold positions from market making against institutional clients; they (usually) have no idea/opinion about pricing. And prop trading shop collects edge from market making again millions of smaller retail players, and take on positions that they think are good while market making.

To put into a solid example: We have a hedge fund H, Bulge Bracket trading desk B and Prop Trading firm Citadel. Suppose tomorrow is walmart earnings and H figured out the result will be better than market expectation using satellite images and they want to buy 1 million shares today. Assume the stock is trading $150 today but tmr it will trade $155.

H has 2 options:

1. They go to B to execute their trade. Sales get the call from their client H and ask the trader for a market. The trader at B looks at the market, has no opinion about the trade, but want to collected edge and maintain client relation. Trader told the client that they can sell 1 million shares at 150.1, collecting 10c per share for a total edge of 100k. They go to the market to take off some of their position, and keep some or all of it on their book, and buy some S&P to hedge against being short Walmart.

2. H execute in open market. In this case smart folks at Citadel see that someone is slowly executing buy orders on the stock. Say somehow Citadel know this person is right, then what they will do is that they will market make on the screen collecting edge, but buying more often then they sell. In this case, the price will get pushed to say $152, H will be long 1 mil share, citadel will be long 500k shares, and a lot of retail investors or even some other prop trading shops not identifying the toxic trade would have sold after seeing price go up to 152.

In this example, if the client H is right then they make, B will lose money after collecting edge. C will make money if they figure out that trading against H is toxic. If Citadel did not they will lose money and overtime goes bankrupt. Please not this is a very simplified version of the market.

Citadel can make money without being a market maker, so can most of prop trading shops. However, being market makers allow them to get into position with less market impact. I would say there is not much similarity between prop trading shops like Citadel and Optiver vs BB trading desk.


I agree with you on most of this here but now prop firms like Optiver also have institutionally oriented desks. In your example, this would mean client H also pings the sales guy at Optiver and trades with them. At that point, I think it's a relationship game with HF A trading with the Sales guy at Bank B for years and not switching. At some point, these HFs have a fiduciary responsibility to their investors though for best execution and pricing and if the market-makers were significantly better at pricing OTC blocks they'd probably put bank desks out pretty quickly so there must still be some competition as the prop/MM's enter into that space.

One of the biggest differences between a prop firm like Optiver and an S&T desk is the balance sheet behind Goldman Sachs vs a market-maker. Market-makers are actually starting to enter into the same space banks as they open up institutional trading arms, however, for some illiquid products that require massive balance sheets banks will still have the edge.

These institutional trading arms at Optiver and the other market-makers are actually rarely filled by internal/new-grad hires I think and are mainly poached from S&T desks at banks as the role is relatively similar. 

Here's Optiver's posting for an Institutional Trader role. CitSec has an institutional desk, same with Flow, IMC, DRW, and others.


Edit: Just realized commenter below me highlighted the market makers starting to open up the institutional trading desks.


Posting from throw away here. Differences are beginning to grow over time. Lines were blurred even as recently as 2020 but what’s happening is firms like DRW, Optiver, and IMC are increasingly specializing in front-end liquid trading while banks are focusing on back end OTC trading because they can’t compete. Banks reach out direct to a lot of HFTs these days to hedge front-end risk or to tidy strikes or roll positions.


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