These days market makers face a dizzying array of risks and opportunities, being active in scores of correlated markets at any time. It’s common, for example, for a trader to make markets and hedge risk across the entire German interest-rate curve and to hedge them all on a portfolio basis.
Throughout the past year or so, a powerful new wave of tools has taken hold across the industry, especially in options. Actant’s AQTOR, for example, not only makes it possible to calculate and adapt to the risk of an entire portfolio in real-time, but gives traders the ability to employ hidden orders and scores of other tricks of the trade.
Because efficient market-making has created spreads so tight that market-makers can’t live off of scalping, they’ve become more trader-like — not only making markets in their obligatory strike prices to get the rebates offered by exchanges, but also trading those markets more aggressively.
“The anonymity of the screens has a lot to do with that development,” says Darren Sirr, a former floor trader now working as a market-maker with CLO in London. “On the floor, all the traders would tend to make the same price because there was this peer pressure to not carve the cartel.”
And with all that money being thrown around, exchanges have come up with more and more ways of making sure it doesn’t land in the wrong place. Eurex, for example, is among many offering both a delta protection system, which sets limits for customers within the market itself — so that if a member firm exceeds a certain number of clients they are pulled out, and so-called “heartbeat” protection for when a market-maker hasn’t updated his positions in a certain amount of time, then he’s pulled from the market.
These developments encourage algorithmic trading, which Eurex boss Andreas Preuss says has just begun to grow. “We’re going to see faster and faster trading of the same amount of capital,” he says.