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I am learning various strategies to day trade the emini SP500 futures contract (ES) based largely around order flow principles and price action. I have been wanting to learn more about market making styles that can be used on a manual basis rather than automated basis. From what I have read, most market making styles revolve around getting filled on the bid/ask and trying to take one tick and either scratch or take a very small loss if that one tick is not realized. Is this the case? I realize the ES is used for a huge number of reasons from stat-arb to position trades/hedging and virtually everything in between. As a day trader, being risk averse is very important to me and from what I have heard, market making styles tend to be highly risk averse. Any input on being a market maker in these markets is appreciated. I know many prop firms hire traders (click traders, not necessarily HFT traders) to scalp or "make a market" in the index futures.

Thanks

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  • $\begingroup$ try Gary Norden - (the end of bull) - He teaches this kind of marketmaking style trading in index futures $\endgroup$ – GAM Sep 16 '17 at 18:21
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The idea is to make both sides of the market in some size eg 2000.01-2000.02, 100x100. If you get lifted you continue to work the bid side for some period of time and then if you don't get hit, you give up and lift the offer. As long as you get filled on both sides some of the time, you make a small amount of money. The problem comes when you get lifted and the market becomes 2000.02-2000.03. Then you are short at 2000.02 and are underwater. The fact is, this happens more often than not nowadays, due to the increased participation of algorithms. Hand-scalping is not very easy nowadays.

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The most generic paper I know about market making is "Dealing with the Inventory Risk. A solution to the market making problem", by Olivier Guéant, C.-A. L and Joaquin Fernandez Tapia. Olivier Guéant just issued a book on this topic: The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making. It recommend it; it is practical and can be used by quants to make markets.

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