Workshop Traders Trophy By Michiel Lescrauwaet & Lukas Lambregt

What is Market Making?

Market Makers

•  Maintain liquidity and assure a fair and orderly market

•  Capture profits through relatively small spreads (=> example)

Example

Assume:

1) Market maker has Apple stocks and cash at hand

2) Bid/Ask spread Apple: $112/$112,30 (for the sake of simplicity)

Now:

Client wants to sell 1000 stocks in Apple. Balance market maker: -$112 000

Market maker hopes to get a buyer real soon (market risk)

New ‘best ask’: 112,25.

Another client buys 1000 stocks in Apple at $112,25. Balance MM: +$112 250

Conclusion: Market maker makes a profit: $250

Market Makers

•  Maintain liquidity and assure a fair and orderly market

•  Capture profits through spread and position in the market

•  Market risk for a brief amount of time

•  Compensated for this risk by charging commissions and fees

The Traders Trophy Platform

How to flow-trade

•  First hour: discover the trend

•  Start with a small position until you have

a better understanding

•  ‘the trend is your friend’

•  Support & resistance levels

•  Read the news and extract the signal

from the noise

•  Avoid the electronic market (expensive)

•  Cut your losses, if any

•  Don’t break your position limits

Calls •  Take care of your clients

Ø  Answer ALL the calls

Ø  Give good quotes

Ø  Small spread (0,01-0,1) use

Ø  Not so profitable but your goal is to keep your clients happy

Ø  Keep the lines open

•  Call other brokers or traders (semi-finals)

Ø  Lower transaction fee

Ø  Wait and see (cf. example)

•  When brokers call you and you want to

Ø  Buy: increase your price( )

Ø  Sell: lower your price( )

Ø  Manage your risk: widen spread ( )

What would you do? Buy/Sell

•  Sell shares to BOA for 208.92, market price = 208.99 à No Go!

•  Buy shares from BOA for 209.41, market price = 209.34 à No Go!

Ø  The best trade might be no trade

Assessment Profitability (33%)

•  Actual profit

•  Return

•  P&L volatility

•  Limit usage

Risk profile (33%) •  Limit breaking

•  Risk control

•  P&L volatility

•  Trading volatility

•  Number of trades

Trading (33%) •  Speed

•  Client Focus

•  Market making

•  Number of calls

•  Clients response

•  Cut your losses, if any

•  Start with a small position until you have a better understanding of the market

•  Write down your key stats (semi final): P&L, latest trade, position, market price

•  Don’t break the position limits (number between brackets)

•  Call as much as you: be a market maker, not a market taker

In short

•  trade enough (100-200 trades)

•  Keep the lines open

•  It’s not all about P&L

•  Practice a lot (multiple accounts)

In short (2)

Good Luck!