SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
JT77
Topic Author
Posts: 38
Joined: November 27th, 2011, 7:07 pm

Do market makers trade in the same securities they "market make"?

April 26th, 2013, 6:55 pm

I have the book "All About High Frequency Trading" and within it it describes a HF set up. The imaginary firm provide quotes as a market maker, but the book also suggests the same firm also use proprietary algo trading. This seems a bit strange to me if they are trading on the same stocks they are market making. Could someone explain under which circumstances a market making firm would also perform prop trading? Would it be same/completely different stocks? Same stocks different markets? Different asset classes?I ask because a market maker prop trading in their own market seems a little like trying to play against yourself at pool (difficult)- unless one could consider the fact there are other market makers and then it wouldn't be the case?
Last edited by JT77 on April 25th, 2013, 10:00 pm, edited 1 time in total.
 
User avatar
Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

Do market makers trade in the same securities they "market make"?

April 27th, 2013, 3:18 pm

If a firm's desk prop trades the same instrument that another desk within the firm makes mkts in, the two desks in question are normally chinese walled. If I am not mistaken, that's a regulatory requirement.
 
User avatar
bearish
Posts: 5810
Joined: February 3rd, 2011, 2:19 pm

Do market makers trade in the same securities they "market make"?

April 27th, 2013, 8:13 pm

This is not my area of expertise but I believe high frequency trading firms in many different venues employ strategies that are in effect market making, i.e. trying to earn the bid/offer spread by providing liquidity to the market, without having any formal status as "market maker". In this case, I don't see any conflict (regulatory or otherwise) in simultaneously also employing other strategies in the same market.
 
User avatar
Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

Do market makers trade in the same securities they "market make"?

April 27th, 2013, 10:13 pm

Indeed... As bearish notes, the important distinction isn't about market-making, per se. It's more about whether the mkt-maker in question is client-facing, in which case there are regulatory constraints which result in all sorts of chinese walls.
 
User avatar
Zhdavid
Posts: 1
Joined: April 28th, 2013, 5:32 am

Do market makers trade in the same securities they "market make"?

April 29th, 2013, 5:40 pm

Yes. Because a Market Maker is carrying a book at any given moment, it will "trade" the components of that book as well. Most often we are hitting/lifting to reduce exposure, but sometimes when a theoretical price significantly crosses an inside market, we will lift that as well. Hope this helps.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On