Comments on: How do market makers adjust prices? http://theessentialsoftrading.com/Blog/index.php/2008/09/16/how-do-market-makers-adjust-prices/ Information and resources for those looking to learn about trading and the markets Sat, 04 Feb 2012 14:17:59 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: John http://theessentialsoftrading.com/Blog/index.php/2008/09/16/how-do-market-makers-adjust-prices/#comment-12859 John Thu, 18 Sep 2008 11:43:12 +0000 http://www.theessentialsoftrading.com/Blog/?p=583#comment-12859 Wally - You're right that competition is fierce and spreads narrow, but at the same time volumes generally rise over time so there's plenty of money to be had in the market making game. The creation of all the new forex brokers/dealers is a perfect example of that. As for it being easier and more profitable to play those larger swings - do you really think so? There are an awful lot of people out there trying to do just that and most of them aren't succeeding. Wally – You’re right that competition is fierce and spreads narrow, but at the same time volumes generally rise over time so there’s plenty of money to be had in the market making game. The creation of all the new forex brokers/dealers is a perfect example of that.

As for it being easier and more profitable to play those larger swings – do you really think so? There are an awful lot of people out there trying to do just that and most of them aren’t succeeding.

]]> By: John http://theessentialsoftrading.com/Blog/index.php/2008/09/16/how-do-market-makers-adjust-prices/#comment-12858 John Thu, 18 Sep 2008 11:39:45 +0000 http://www.theessentialsoftrading.com/Blog/?p=583#comment-12858 <i>From Wally in response:</i> John, I both appreciated and was impressed by your prompt reply. The first, because I expected platitudes and generalities instead of a straight answer. The latter, because you said that you didn't really know. In my book it's a sign of a great mind - to publicly acknowledge ignorance. After all, who knows everything? I'm not sure that "working the spread" is the main source of profit for MMs. Spreads nowadays are mostly 1c and the competition is brutal. Since MMs are allowed to trade for themselves (including naked shorting!) it's easier and more profitable for them to initiate or exaggerate swings of 10-30c. Even if I'm too cynical, their experience, superior tools and no need to pay commissions+spread -- all give them the edge aside from manipulation. I would be king if I didn't have to pay 3c commission on a roundtrip and could buy at the bid! Thank you, Wally From Wally in response:

John, I both appreciated and was impressed by your prompt reply.
The first, because I expected platitudes and generalities instead of a straight answer. The latter, because you said that you didn’t really know. In my book it’s a sign of a great mind – to publicly acknowledge ignorance. After all, who knows everything?

I’m not sure that “working the spread” is the main source of profit for MMs. Spreads nowadays are mostly 1c and the competition is brutal. Since MMs are allowed to trade for themselves (including naked shorting!) it’s easier and more profitable for them to initiate or exaggerate swings of 10-30c. Even if I’m too cynical, their experience, superior tools and no need to pay commissions+spread — all give them the edge aside from manipulation. I would be king if I didn’t have to pay 3c commission on a roundtrip and could buy at the bid!

Thank you,
Wally

]]> By: John http://theessentialsoftrading.com/Blog/index.php/2008/09/16/how-do-market-makers-adjust-prices/#comment-12851 John Tue, 16 Sep 2008 13:36:37 +0000 http://www.theessentialsoftrading.com/Blog/?p=583#comment-12851 That's great Nick. Thanks for adding your experience to the discussion. That’s great Nick. Thanks for adding your experience to the discussion.

]]> By: Nick http://theessentialsoftrading.com/Blog/index.php/2008/09/16/how-do-market-makers-adjust-prices/#comment-12850 Nick Tue, 16 Sep 2008 13:22:48 +0000 http://www.theessentialsoftrading.com/Blog/?p=583#comment-12850 This is a very specific question with not very specific answers. I was a market maker for a major Wall Street firm for over 7 years. Most of the time market maker quotes are updated automaticlly by an internal computer system with parameters set by the market makers on a stock by stock basis. For instance if i buy stock on the bid, the sytem will automatically move my big quote down by .25 as well as my offer. In volatile situations, these automatic settings are taken off, and market makers move there quotes manually. I might want to move by .50 or 1.00 of a stock is really volatile. Hope this helps This is a very specific question with not very specific answers. I was a market maker for a major Wall Street firm for over 7 years. Most of the time market maker quotes are updated automaticlly by an internal computer system with parameters set by the market makers on a stock by stock basis. For instance if i buy stock on the bid, the sytem will automatically move my big quote down by .25 as well as my offer. In volatile situations, these automatic settings are taken off, and market makers move there quotes manually. I might want to move by .50 or 1.00 of a stock is really volatile. Hope this helps

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