You may not directly participate in capital markets but institutions around you that society relies on do. They do so to secure operating cash, loans, buy or sell insurance, etc. When people participate in capital markets they do so looking to make a profit or to purchase some utility, ideally these people have done some research about their trade before firing. Market makers compete for the right to charge you a fee (the spread) to make that transaction. You’re paying a fee to sell them risk (the risk that you’re correct with your opinion). Collectively this adds up to information exchange between all parties becoming less expensive: more participants on either side of any trade, smaller spreads, etc. Less friction.
Options MMs are more or less directly buying and selling insurance.
Devil in the details. MMing is conceptually simplistic but the operational costs are huge and are generally getting worse. Making while fighting these costs against competition playing the same game as you turns non trivial real quick.
That said MMs have mostly consolidated heavily over the last decade (due to many firms collapsing against competitors) so in some ways the business has been commoditized. Not sure if true of MMing ETFs as an authorized participant (JS bread and butter) though, idk much about the logistics there.
Collectively they reduce friction and increase transparency for global information exchange. Obviously no one does it for purely altruistic reasons but the byproduct is (probably) net positive.
Usually too smart, on rare occasion they cheat. MMs inherently deal with information assymetry and adverse selection because they generally stand ready providing liquidity with quotes out in the world (though obviously width matters). Toxic counterparties are parties who decide to trade against you who have a better idea about “true” price than you. They might make or they might not, depends if the degree in which they’re right overcomes the spread they crossed. Other MMs can be (and often are) toxic.
Mainstream adoption is independent if the app is centralized or not. You are ignoring the people who use Netflix, TikTok, Instagram, etc. People care about the brand offering not if they are decentralized or not.
I’m not sure about delta one firms but almost all the options MM firms have been having record years in the COVID / meme stock era.
In broad strokes, the things that hurt market makers the most are long winded price trends and accumulation of inventory. So generally MMs can and often will eat large initial losses (depending on how many wings they happened to have owned at the time) when huge volatility spikes happen but when the raised volatility stays at that level for some amount of time (you’ll sometimes hear this referred as market “regimes”) and the MM was able to not blow out from the initial spike they’ll more than make up their losses from the good trading environment after the fact.
Market makers as a whole were suffering during the mid 2010s when volatility was low year to year, correlation with SPY was high, and all the indices basically just went straight up every month.
I work in a vanilla MM space and have had limited exposure to systems/technical side in the crypto space, would love to see the weird/cute crypto-specific problems that exist.
For instance I was surprised to learn the other day that FPGAs are becoming standardized in the crypto space now as well, since to my knowledge network bottlenecks are more difficult to be precise about due to the common usage of websockets, the non-standardized colocation services offered, etc. But what crypto MMs are using FPGAs for, is to do actual JSON (maybe it's FIX by now?) parsing since that became a common bottleneck due to the lack of binary protocols from crypto exchanges.
That's very interesting! I myself have not worked as a MM before so I don't know much about it. I can imagine it is possible since these days there is a lot of cross pollination between traditional finance and crypto. Most exchanges will do Json, though I know of several who have FIX interfaces also.
It's probably strictly worse than other exchanges if we're considering what the point of an exchange actually is. I've tried optimistically viewing LTSE from multiple angles but an exchange just seems like the fundamentally incorrect business model for their supposed goals.
How else do you measure whether it is successfully diversifying if not by revenue or more importantly profitability?
Contrast Google with Apple. Even though the iPhone is 60% of Apple’s business, last time I checked, the Mac business alone would put its revenue well within the top 100 companies.
