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Life as a Market-Maker

December 22, 2016

Chapter 47 in the exclusive series for Dynamic Commodities- becoming a commodities trader

The life of a market maker is stressful. From the moment you arrive at work to the moment you leave the phones ring off the hook.

Making a market is a process of giving the counterpart on the other side of the phone a bid price where the market maker is willing to buy and an offer price where the market maker is willing to sell. It is a fast and furious process. Hitting the bid occurs when the counterpart sells to the market maker. Lifting the offer occurs when the counterpart buys. As a market maker, the overall current position is an important factor when it comes to quoting a bid and offer. If a market-maker is already long, they are more likely to show a lower quote, a more attractive offer to sell some of an existing position. When short, the quote is often higher and a more attractive bid will increase the chances of buying back against the risk position.

When it comes to an individual commodity like gold, silver, copper, oil or any other market quoting is often unidimensional. However, customers and counterparts often asked for quotes or two-way prices for spot or cash settlement as well as forward dates in the future. Additionally, market makers will quote for delivery in different locations or different grades or qualities of a commodity. Sometimes quotes were for the commodity in a different currency and before the euro, there were many of those to choose from. When someone acts on the market makers quote, a hedge is often necessary. Hedging a purchase often involves a sale on the futures exchange. Hedging a sale meant buying on the futures exchange.

With so many different strike prices and expiration dates in the options market, making markets on options is a more complicated process. Therefore, there is a tremendous amount of information that must be taken into account when quoting a bid and offer price. Together with Sid and Ralph, we made bid and offer prices on gold and silver options throughout the day with the aid of a computer pricing model. With the prices of the underlying commodities moving up and down each second, each time we made a quote we put the company at risk.

The life of a market maker is both exhilarating and nerve-racking at the same time. Market making is a job best suited to an action junkie. The one thing I can say about my days of making two-way prices is that I never, for one second, got bored. The immediate gratification amounted to thrill of victory and the agony of defeat constantly throughout the trading day.

Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities

 

 

Post Series: Origin Of A Commodities Trader

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