0 1 Relationship between Market Maker and Option Market
The number of contracts in the options market is huge, and many contracts are in a state of deep price or bid for a long time, which will inevitably lead to insufficient liquidity. Most options exchanges in the world have introduced the corresponding market maker system to increase market liquidity.
There is no essential difference between option market-making strategy and other assets such as stocks, bonds, futures and foreign exchange. The core strategy is based on obtaining bid-ask spreads and avoiding unilateral risks.
An excellent market-making strategy is that the market-making organization is based on the core competitiveness of the market and regards it as the core secret of the company.
Generally speaking, there are two main functions of market makers: one is to gather market risks, and the other is to adjust the balance between supply and demand in the market, so that participants in the option market know where to trade.
If there is no market maker, it may be difficult for market participants to find a counterparty that is completely opposite to their own views at a certain point. For example, an industrial customer wants to make a 6300-point put option that expires on June 25th, but another industrial customer may want to make a 6200-point put option that expires on June 26th.
If there is no market maker, it is difficult for customers of these two industries to get together; If a market maker participates, it can clearly know what kind of risk hedging relationship exists between the two options, so it can trade with both parties at the same time, match them together by charging a small fee and bear the risk of the difference between the two options.
Market makers maintain market liquidity through the market-making system and meet the investment needs of public investors. At the same time, the cost of the service provided is compensated by the difference between the appropriate bid and quotation, and a certain profit is realized.
02 market maker profit model
The main profit of market makers comes from the bid-ask spread of two-way quotation. Therefore, market makers need to calculate the theoretical price of options, gradually accumulate the price difference between each transaction and the theoretical price in a large number of trading transactions, and dynamically adjust the price difference according to the characteristics of positions.
Because market makers mainly do passive trading, if some counterparties continue to trade unilaterally, market makers may face losses.
The profit model of market makers is not limited to earning bid-ask spreads, they can also make money through arbitrage trading. For example, option arbitrageurs take advantage of the pricing differences between different contracts, undervalued contracts, short-selling contracts and overvalued contracts to make profits.
In addition, market makers can increase their income by exchanging kickbacks, which is even an important source of income for market makers in the fully competitive American market, because the option spread is very small and it is difficult to bring ideal income.
The classic case of trading commission rebate is new york Stock Exchange, and new york Stock Exchange returns the commission to "market liquidity providers" and encourages them to conduct daytime trading, thus ensuring market liquidity.
To sum up, there are various profit models of market makers, but each method is accompanied by costs and risks, which requires market makers to design corresponding strategies to deal with.