{ Market Making The Trading Pitt 2011

Bid – Price immediately you can sell at Bid – Price immediately you can sell at Ask/Offer – Price you can immediately buy at Ask/Offer – Price you can immediately buy at Understanding the Order Book

Prop Firms Prop Firms Bulge Brackets – Sales and Trading Bulge Brackets – Sales and Trading Individuals Individuals Automated and Manual Automated and Manual Types Market Makers

Banks often have large inventory of stocks, currencies, or bonds Banks often have large inventory of stocks, currencies, or bonds They attempt to balance this with client demand They attempt to balance this with client demand Allows them to take on less risk Allows them to take on less risk Supply and Demand in addition to what type of customer you are determines the price you get Supply and Demand in addition to what type of customer you are determines the price you get Inventory Management

The goal is to attempt to find out where a customers threshold price is The goal is to attempt to find out where a customers threshold price is If trying to find a long order they issue sell limits orders and step down if it is not filled it is cancelled. If trying to find a long order they issue sell limits orders and step down if it is not filled it is cancelled. Customer usually divides orders into segments Customer usually divides orders into segments When the algo finds the price it bids under gets shares from another venue and then offers back to the customer at their threshold price When the algo finds the price it bids under gets shares from another venue and then offers back to the customer at their threshold price Basically magic Basically magic Automated Market Making

Arbitrage – Conversion Arbitrage Arbitrage – Conversion Arbitrage Ever tried getting filled on an options order? Ever tried getting filled on an options order? Level 2 Strategies Level 2 Strategies Showing a Firm Bid in a weak stock Showing a Firm Bid in a weak stock Internal Bids/Offers Internal Bids/Offers Cant Cross Your Own but somebody at your firm can Cant Cross Your Own but somebody at your firm can VWAP Execution and Price Bands VWAP Execution and Price Bands Sales Traders Use VWAP as their Benchmark for execution Sales Traders Use VWAP as their Benchmark for execution Price bands are a way to stack orders Price bands are a way to stack orders Strategies

Goal is to get the highest PnL Goal is to get the highest PnL How do you get this? How do you get this? Have a wide spread and manage your inventory with the market and your clients Have a wide spread and manage your inventory with the market and your clients If you think the market is going to go up offer you client a price slightly better than the market or at market If you think the market is going to go up offer you client a price slightly better than the market or at market They sell to you and you are now long They sell to you and you are now long Widen your spreads to give you more room Widen your spreads to give you more room Alter your quotes to different clients Alter your quotes to different clients Oxyor Simulation

This is Traditional Sales and Trading on a simplified scale This is Traditional Sales and Trading on a simplified scale Though a little harder because this market is pretty much random Though a little harder because this market is pretty much random 3 Rounds – 1 Practice and 2 Live 3 Rounds – 1 Practice and 2 Live Good Luck!