> When a pension fund wanted to execute a trade, they would have had to cross the spread, and, statistically speaking, half the spread would immediately accrue to the market maker as profit. ..so this is money that YOU, the holder of a pension, are losing, and that THEY, the rich folks acting as market makers that the public likes to get mad at, are taking away from you.
This is totally incorrect. Let's say a pension fund wants to sell 1000 shares of APPL. The bid is $99, the ask is $101. They sell to the bidders and get $99,000 (minus some fees to the exchange probably). Your pension scheme just successfully liquadated their position.
At this point, contrary to what you say, the market maker has made 0 profit. What they've done, is taken a position in APPL which they think theoretically is profitable, but they aren't in the business of speculating on APPL. So now they have to hedge that risk by buying negatively correlated products and slowly trying to offload that position either by letting the market fill their offers on the ask, or hoping the bid improves. Once they have paid for their hedging and closed out their position according to their strategy over a period of time, whatever they have left is their profit.
What you paid that market maker for was for taking on the risk of holding the product whilst spending time to offload it to the rest of the market.
What GSAT do is say "Hey, don't sell this to the market, let us take care of that for you"- which is exactly the same service a market maker provides except they don't quote publicly, and in fact they probably do this by working with market makers.
Don't start a reply with "this is totally incorrect", when you're merely pointing out a simplification or approximation.
I was making a point about the business model of a proptrader marketmaker versus the business model of an algorithmically sophisticated broker and needed to establish some preliminaries and it would have served zero purpose to go into the particulars of the costs related to risk warehousing.
Having worked for an equities highfrequency marketmaking business myself: Mark-to-market at mid-price is the benchmark that those traders will use for figuring out, at the end of the day/week/month, whether it was a good or a bad day/week/month, and at the end of the year for negotiating their bonuses, even when they are left holding some positions with uncertain future. Everybody knows that it's a simplification/approximation, but, due to the efficient markets hypothesis, it's a very good one.
It's the kind of approximation where it's being taken for granted that people understand that it's not ACTUALLY the trader's profit. Because otherwise one would need to include in the discussion the fact that the receptionist at the proptrader marketmaker's office building is also a cost factor eating into their margins.
I didn't mention the risk warehousing for the same reason I didn't mention the receptionist. And I'm not going to go into a rebuttal about how it's definitely not necessary to hedge every single trade, for the same reason: because it's not the topic under discussion here.
Maxim of quantity:
* Make your contribution as informative as is required (for the current purposes of the exchange).
* Do not make your contribution more informative than is required.
So, to conclude: Your conversational move in this language game was a pretty weak one. The sentence "this is totally incorrect" however sounds like someone trying to establish dominance. Weakness and trying to establish dominance is a bad combo.
It's not a simplification. It completely misrepresents how market makers make money. They are taking on risk and they have to handle that risk. If you're trying to make a nuanced point, then you need to get at least the basic fundamentals of the business model right.
You have written something that doesn't actually say what you mean. Frankly, the fact you think that market makers' management of risk is as relevant to their business model as a receptionist means you either don't have a good handle on what market makers do, or you're MASSIVELY over-paying your receptionists.
This is totally incorrect. Let's say a pension fund wants to sell 1000 shares of APPL. The bid is $99, the ask is $101. They sell to the bidders and get $99,000 (minus some fees to the exchange probably). Your pension scheme just successfully liquadated their position.
At this point, contrary to what you say, the market maker has made 0 profit. What they've done, is taken a position in APPL which they think theoretically is profitable, but they aren't in the business of speculating on APPL. So now they have to hedge that risk by buying negatively correlated products and slowly trying to offload that position either by letting the market fill their offers on the ask, or hoping the bid improves. Once they have paid for their hedging and closed out their position according to their strategy over a period of time, whatever they have left is their profit.
What you paid that market maker for was for taking on the risk of holding the product whilst spending time to offload it to the rest of the market.
What GSAT do is say "Hey, don't sell this to the market, let us take care of that for you"- which is exactly the same service a market maker provides except they don't quote publicly, and in fact they probably do this by working with market makers.