The role of the Market-Maker

The Market-maker is central to the smooth operation of the market and hence is key for making the game as realistic as possible.

The key aspect is that the MM has no incentive to make money, only to avoid losing a lot. Any money the MM makes goes to the Bar Bill that is expected to pay for the drinks after a long afternoon session. This is not a position to give to a junior member of the group.

Given that approx 60% of total volume goes through the MM, the key function is to move the market to the point of balance. It is therefore better to lose a little money by moving (for example) the spread beyond the original bid-ask and flushing out a couple of quick profits for the other dealers than to take a wrong direction view, in particular between trading sessions. The tails of the distribution in the second pack include numbers that can move the market by +/- 20 points.

Compensation for the MM only comes from the bid-ask spread which at a fixed 3 point spread so long as he can find a balanced market and get sufficient volume done.

Unlike the LT who can shout out Bid or Ask prices at any time, the MM also is required to make a two-way price at all times. This is tough to maintain but is an important component to maintain a functioning market. This is particularly true during the last trading session where the Hedge funds have to unwind all of their positions. sometimes with size that is multiple the 5 that the MM is good for.

To keep the noise level up, the MM should continue to shout out the market levels during the trading sessions.

One last aspect of the MM is to keep track of he open interest, less on the PL which should not be a distraction, but more on the net position. Target is always to be close to home when the closing bell calls. It is surprisingly difficult to maintain the bid-ask price, deal, create deal tickets and keep track of open position at the same time. Hence the pads!