[Deleted a previous reply out of an abundance of caution about proprietary strategies]
That matches my first order academic understanding of market makers, but not the more detailed work I've read, or the work of the QRs at the handful of market makers I've spoken to/worked with.
It didn't seem like connecting trades were a particular focus of the people I've spoken with- is that something that happens off exchange? My understanding is that would happen automatically on the exchange, and that primarily market makers connect trades across time, pocketing bid/ask spreads but accepting risk of adverse price movements while they hold that position. To mitigate that risk, they do a bunch of signal analysis to set the spreads low enough to be competitive, high enough to mitigate that risk. Some market makers famously pay and provide price improvement for small/uncorrelated orders from retail brokers. I was told that that was specifically because of the reduced risk of adverse market movement from retail orders.
Market makers are generally required to always provide buy and sell prices, or risk fines/losing their market maker status on an exchange, right? Those prices might be extremely unreasonable (e.g. in a flash crash setting sell prices to 9999999), but if there's a market maker, there is required to be a price at which they will execute a trade, whether or not they can hedge that risk or now.
That matches my first order academic understanding of market makers, but not the more detailed work I've read, or the work of the QRs at the handful of market makers I've spoken to/worked with.
It didn't seem like connecting trades were a particular focus of the people I've spoken with- is that something that happens off exchange? My understanding is that would happen automatically on the exchange, and that primarily market makers connect trades across time, pocketing bid/ask spreads but accepting risk of adverse price movements while they hold that position. To mitigate that risk, they do a bunch of signal analysis to set the spreads low enough to be competitive, high enough to mitigate that risk. Some market makers famously pay and provide price improvement for small/uncorrelated orders from retail brokers. I was told that that was specifically because of the reduced risk of adverse market movement from retail orders.
Market makers are generally required to always provide buy and sell prices, or risk fines/losing their market maker status on an exchange, right? Those prices might be extremely unreasonable (e.g. in a flash crash setting sell prices to 9999999), but if there's a market maker, there is required to be a price at which they will execute a trade, whether or not they can hedge that risk or now.