In a double-auction market, buyers and sellers are always balanced in number -- a traditional market-maker in such markets doesn't really hold any assets/take any position long-term.

However, with a logarithmic market maker, the market maker holds the opposite side of every trade, and the price actually depends on the imbalance in the number of "YES" and "NO" stocks issued (if they are equal, all prices will just be $0.5).

In particular in an option market, the market maker may trade with option-buyers and option-writers, and you can end up with more options written than bought.

How, then, does a market-maker know when to exercise the options it holds (i.e. make the option-writers "pay up")?

  • 2
    $\begingroup$ Pleas don't ask the same question in economics, personal finance and here. Cross posting is discouraged. $\endgroup$
    – AKdemy
    Jun 29 at 17:44


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