ISE educational presentations are now available via the iTunes Music Store. Visit Option Education @ Your Fingertips for free ISE podcasts. Sent from my Blackberry. Alex Jacobson ajacobson@ise.
----- Original Message -----
From: Jacobson, Alex
To: 'OptionClub@
Sent: Sun Sep 06 22:38:37 2009
Subject: Market Making
All the discussions of market making on how we trade as customers is somewhat out of balance. Market making from the first days of the CBOE in April 73 to the high velocity trading that is done today has almost nothing to do what we discuss on this board. A great book about market making which can still be bought used is "The Business Of Options by Marty O'Connell. It can still be bought used at Amazon. I make everybody who works at the ISE understand it. In the early days of the CBOE the firm of O'Connell and Piper essentially trained the floor Most of the early CBOE members may still have the original VHS training tapes. They are priceless from a knowledge standpoint. Market making has really had very little to do with payoff diagrams as no market maker has a time frame that long. Market Makers have to make markets and until the 87 crash market making was pretty much a delta neutral business with huge leverage. Every time academics have studied market making they discover that almost no money is made from the actual option trading. It's almost always made from the hedging activity. If you watch CNBC Dr J quotes this fact all of the time
Post 87 the surviving market making community evolved to pretty much a very leverage conversion reversal business and again the money wasn't made from the option side, but rather from the borrow lend function. A fully hedged MM with a dollar in capital can carry $20 dollars of hedged position
In 2000 with the innovation of multiple listing and the shrinking spreads there was massive consolidation of the mm community and market making today is high volume high velocity volatility trading. Three large mm firms are half the mm volume most days and the top 7 or 8 are pretty much 80 - 85% of the volume most days. Most major MM firms runs three core hedges. Names that have a good R squared to the S and P, Nasdaq the names that don't correlate well like GOOG and ISRG. The typical objective of a MM firm today is to net a couple of dollars after all hedging and payment for order flow costs. At most firms the largest single expense is technology costs and payment for flow
The key point to take away is their margins are tiny, but their volumes are huge. No market maker will ever have a view of the market for more than a few minutes. They may have a view of volatility and that is pretty much what their business has become. If you think the Goldman or Citadel market making desk has a view of the market you misunderstand the business of market making
If anything we on this board are closer to prop traders
If you still find a copy of Marty's book or the original First option O'Connell and Piper VHS tapes the are priceless
ISE educational presentations are now available via the iTunes Music Store. Visit Option Education @ Your Fingertips for free ISE podcasts. Sent from my Blackberry. Alex Jacobson ajacobson@ise.
To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe
No comments:
Post a Comment