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Post by stockw on Feb 11, 2014 16:24:22 GMT
Hey, so I came through this market making simulator, probably you know the product: live.marketsims.com/TSDemo/I would like to have a couple of questions about it if you have the time: - Is this basically a kind of "fair" simulation of market making, when it comes to cash equities? - Why would I want to make a call out to another bank for let's say to buy 1000 stocks of a company, when probably I would get a shitty price and I could just keep buying on the market till my inventory hits 1000. - What would be the "best strategy", let's say the most optimal for making the most P&L with it? I am trying to get the main idea behind profitable market making with this simulator, I mean the market environment is obviously simulated, but what are the fundamentals behind making the most P&L with let's say a medium risk on this simulator? Thank you! |
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Post by Admin on Feb 12, 2014 18:54:27 GMT
I would say that simulator is good in getting someone used to thinking at the speed they need to, but thats about it. The thing is every product has small nuances in the calculations you need to do quickly and things you need to think about, and its something you learn with your product if that makes sense. For example I traded options for a long time, and calculations like gamma b/e pnl's, or dividing by 16 were second nature because id do them multiple times a day. But when I traded bonds for a bit it took some relearning to get those processes second nature. So dont worry if that simulator seems to just be hectic, I wouldnt say its a good predictor of anything. First of all the banks in the simulator should be replaced with IDB's. By market im guessing you mean exchange? If so then if you have a size multiple of whats on the bid/offer then you could probably get a better level. For example with single stock options in Europe they barely ever trade on screen. So like screen might be 10 lots x 10 lots and you want to trade 1000 lots. Well you would call an IDB to get a market, he would call everyone at various banks getting a bid and offer together. He comes back to you with a bid/offer for x size. It might be wider than the screen but then again might be tighter. If the screen is 15 vol - 17 vol on screen. and you want to sell, some guy at another bank might be looking to buy a big size. At least in single stock options in Europe most of the time you will execute at a much better level in the IDB for bigger size than working it on screen. In cash equities it might be a bit less so because screens are more liquid as its a fungible product but the example still demonstrates the idea. Best strategy in the simulator you posted is look for patterns in the price path/news, its not random, its programmed by some person, which means it obeys some rules, you need to see enough simulations to know what the possible news are and what happens  (i dont suggest u do this, its a waste of time . |
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Post by stockw on Feb 12, 2014 20:01:58 GMT
I see, thank you!
Yea I figured it's kind of a waste of time, I guessed I could learn some fundamentals of market making (seems it's really a garbage place to do so then). One last question on this thing though: "when the phone rings" and I need to give a quote on let's say 2000 shares for a bank, how do I make sure I give a correct price (so they don't hang up)? I mean in this simulated, over-simplified simulator?
Also, one more thing: how do market makers protect themselves against big trends (assuming cash equities just to be simple)? I mean let's say for example: there comes a very aggressive uptrending, and clients keep coming in for quotes. Market keeps going up, and you keep building an inventory of shorts (as the clients are buying, and you keep the other side of the trade) at shitty prices - even though if you made markets like you described in your guide - what can you do? How do you get rid of these positions? I mean theres no guarantee price would come back to you at all, so would you just have to take the loss and move on? Is my train of my thought wrong somewhere?
Also I bought the book you recommended and it is in fact a great book - at least I really enjoyed it till it get onto the very first technical aspects of put-call parity stuff and the first steps of basic options valuation, then I couldn't go further.
I haven't given them more deep thought yet though, but am I right in assuming high school math wouldn't really be enough here? I mean I have been taking advanced math lessons for the last two years (eastern europe qualification so slightly different than A-levels) but I am not sure if my knowledge would cut it. I would really want to advance in the technicals right at this stage (got kind of a lot freetime) and not wait till I get onto higher education.
I know this would be a broad question but is there anything "exact" field of math I should start studying in order to start understanding the technicals(calculus I guess)? Also could you maybe give me a basic guideline on how to study the technicals? Like which would be the first one to start off with examining and trying to understand, then which one to follow, then which would more advanced and require much more thought, and so on to the most harcore stuff?
Thanks for your time once again.
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Post by Admin on Feb 13, 2014 20:25:58 GMT
I am not sure, depends how the game is programmed really, there are some rules behind it if its X outside of spread etc etc.
In terms of quoting on a runaway market, thats part of the job is the short answer, to be able to estimate the liquidity of the market. If some piece of news came out or you believe theres a lot of demand, then you need to skew your price. If the market is 98-100, and a client comes in show an offer of 103. Essentially, the idea is that there is always a price for liquidity. Also keep in mind that if a news story just broke and the market is jumping around, you are allowed to go to the client with a wider price, or can show a one way price if you are short, so you show them only a good bid. At that point it also does come down to the client relationship, if its a good client you will stomach a small loss, if its not a good client then you just tell them to fck off or show a one way market.
Uhm in terms of maths you need some sort of grounding in some entry level calculus and probability/EV, but really intuition will serve you much better. Everything with options even if it can be expressed mathematically, can be understood conceptually. If you have any specific questions, please start another thread with them (to make it a resource for everyone) and i will be happy to break things down a bit.
In terms of what maths to study, a good book is actually Quantitative Methods in Finance by Watsham. Its more of a general encyclopedia type of book for concepts you should be familiar. If you dont understanding anything in there just post on here.
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(i dont suggest u do this, its a waste of time