Chapter 12 How a Market Maker Trades
How do market makers trade? There are two answers, a general approach and a “manage the book” approach. At the onset, how a trader acts is what builds the book. Market makers would rather be involved in trading, not in building the book. This is a primary driver in option pricing; market makers dislike carrying positions.
Market Making
The story of market making begins with middlemen. They do one thing: manage demand, regardless of their actual jobs. Middlemen buy fish from fishermen, then sell them at the wharf. Middlemen buy furniture, then sell it to office managers when they need to furnish their offices. Middlemen are some of the biggest companies in the world. Walmart is the world’s largest middleman. ...
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