Answering why market making?
How would market makers answer the question "Why market making?" or "What attracts you to market making in particular?"
(and maybe this links to why not principal trading/investing?)
CORRECTION: When I mean market maker, I actually mean dealer in an OTC market in a bank.
Really depends on what kind of market making - options MM vs. futures MM vs. MM at a bank are all a little different.
Ok maybe we should do this by product (a bit like the trading jungle post on here)
MM at a bank is probably the most useful, but others are also appreciated.
My expertise is only in options market making at a quant firm, but I'll throw in my two cents.
First of all, OMM profitability is not necessarily market dependent - we do well (or tend to) when markets are bad due to the volatility skew to the downside for equities, aka things get more volatile when things are going badly, so there's not really a danger of losing your job in bad times. The flip side is that we don't necessarily always kill it when markets are doing well.
I've only been working there 6 months but I feel that I've already gotten a great feel for the markets that I trade. Flow, what different things mean in terms of institutional perspectives, etc. A few things I don't think I would've learned if I were working in a direct investing space.
The biggest advantage I see in starting out in MM is that you develop a very acute sense of risk and you develop skills in managing the risk of a large book. You really have to provide quotes across all strikes and most months of the product you trade and so you get a great feel for risk reward profiles that you have to consistently manage.
Hope this is helpful - feel free to reach out directly if you have questions specific to OMM.
Maybe we're talking apples and oranges, but the "market makers" I'm familiar with are the Designated Market Maker's (DMMs) on the floor of the exchanges. These DMMs, or floor specialists, are tasked with providing smooth trading in specific securities by providing liquidity when and where needed, taking the buy-side when necessary, and vice versa, to ensure an orderly marketplace.
I can't speak for any DMMs, but I can tell you that, earlier on in my career, if I'd have had the chance to be in the pits on the market floor, I'd have jumped at the opportunity.
Hope this isn't 1000 miles off the mark. Hope I'm addressing what you're asking.
Whats the advantages/disadvantages of this type of MMing with regards to a MMer in a bank? I totally confused about that. Quite possibly Im not aware of all the places you can do market making...
Noob,
I'm sorry, but I do not understand the question. I don't even understand how a banker can be a market-maker. These guys need tons of liquidity backing, the technical wherewithal to determine when action needs to take place on either the buy or sell-side, and their typical edict is to ensure an orderly marketplace.
I would probably answer something along the lines of: -You get to develop a good feel for how various market participants trade around events, which is valuable from a learning perspective when you start your career (applies if you're going for SA or FT role out of school). - You develop an acute sense of how money flows in and out of assets/trades which can be very telling as far as market direction and expectations go. -You might get hints/information from clients/salesppl that you otherwise wouldn't get sitting on a prop desk.
Take this with a grain of salt as I am still a student and have no exp in MM, only prop trading. however, I know from experience that many successful prop traders at the well known shops have backgrounds in MM and/or contacts at banks that can come in handy as far as getting information goes.
being a market maker = "trying" to make the bid ask spread.
You sit on both the bid and offer ALL THE TIME. When the market "vibrates" you'll get hit on the bid, and lifted on the offer...and voilla...you "make the spread"
However, sometimes, the market will not vibrate, it will just trade up up up to higher prices (or down down down to lower prices)...and those offers of yours that got lifted (or bids that got hit) will be losers. Your risk management rules will determine when you exit that trade for a loser and start over. Some markets vibrate more than others...and so those are better for market makers.
The theory of being a market maker is, you hope that your winners will net more money that you lose from your losers. Risk management rules will determine your success or failure. Risk management rules are not static...they are dynamic (they changes) as the market price action patterns change...and learning how to do that well is difficult and takes a long time to learn. This is why most day traders lose money.
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