Thread by @endless_frank

Had dinner last night with partners of a 30+yr old securities firm that specializes in trading equities and derivatives for top quant funds and other HF’s.

I asked them if they had the expertise to explain how market makers effect prices and this is what I learned. 🧵

2/ For starters, and as we all know there are really only 3 or 4 MM’s that control most of the flow.

This CEO had dinner just 2 weeks ago with the CEO of one of the top mkt making firms, won’t say who.

In the words of that market maker, being one “is like living in the matrix”.

3/ Bullets are flying at you non stop from all venues. Some you catch, some you let go by to the next shop. Basically the top MM’s are choosing what bullets they want to catch and what they want to let go by.

4/ So let’s think about this like a trader. If top MM 1 and 2 decide they both want to let the bullet fly by vol expands and price moves rapidly. If they decide to catch the bullets price gets pinned and stuck in the mud.

What determines catch or pass?

Their discretion.

5/ This is what I had feared all along, and that is, if MM’s have the discretion to choose what they want to catch/let fly by, albeit they have to catch bullets x% of the day, the entire trading game is not random and they can control outcomes most of the time.

6/ I was also told that if these top 3 firms simultaneously decided they wanted to let bullets fly by, the entire market would turn upside down and everyone would be like wtf just happened? Does this sound like a random fair market based on supply & demand? Doesn’t to me.

7/ So this was my confirmation that markets are not random & these firms truly do have a monopoly on trading due to the size of the order flow they cover. They have the balance sheet to decide when to catch bullets or let them fly.

8/ That is totally unacceptable if we want a fair and random market which should be based on supply and demand, and not a market makers algorithm or discretion.

9/ Also, think about how volatility effects so many strategies tied to it Eg low vol dividend ETF’s, implicit short volatility strats(vol targeting, yield harvesting etc). These MM’s can change the profile of an asset they cover whenever they choose? Doesn’t sound honest to me.

10/ I can probably go on about this and tie in effects to other asset classes, and what to trade/not trade over another 10-20 tweets, but I will stop here and let you all start extrapolating the rest. /End