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I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM.

Examples: what is their working capital? How much leverage do they use intraday? What returns do they achieve? What is their contribution to trade volume? How to these numbers compare to other market participants?

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The paper "High Frequency Trading and The New-Market Makers" by Menkveld will likely have information that will be interesting to you.

The paper breaks down the activity of one HFT in a European market. It provides statistics such as the # of trades, capital required, average profit, loss, etc. You can judge for yourself whether you trust the numbers based on their methodology. It's an interesting read none the less.

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Market makers covers a broad range of shops, from large investment banks to small proprietary trading firms. So working capital can be in the millions or the billions, and leverage can be anywhere from 2x to 30x. This is no different from buy-side firms, which includes a variety of both asset managers and retail investors. There is tons of diversity among market makers.

As for contribution to volume, a liquidity provider merely quotes a price; the trade doesn't happen until a buy-side counter-party decides to accept. For example, given a trade of 100 shares between a market maker and an asset manager, we wouldn't say that the market maker was responsible for 50 shares of the trade. We would just say that 100 shares were traded.

With this in mind, we can claim that the market maker is responsible for all trading volume, or we can claim that the market maker is responsible for no trading volume (and that the buy-side firm is responsible for all volume). Either seems plausible.

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  • $\begingroup$ i took his question to mean firms using market making strategies instead of market makers in a broad, economic sense. so that would narrow it down a bit and suggest these facets: is there some minimum capitalization required (or recommended) for firms using market making strats? are there reasons some firms use these strats while others dont (other than 'they havent come up with a market making strat with positive pnl')? $\endgroup$
    – a113nw
    Commented Feb 4, 2011 at 20:25
  • $\begingroup$ I took it to mean registered market-makers, who are obligated to quote both bids and asks and get liquidity rebates and can naked short, etc. $\endgroup$
    – tony.kimball
    Commented Jul 13, 2011 at 3:25
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Appropriately, heterogeneity of approaches has been discussed. But one facet that may bear emphasis is the individual firm's transactions costs. To compete as a market maker, is it would seem paramount to have a edge here. Moreover, some exchanges seem to choose their champions, and it would be best to be among them.

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