Rhody Trader
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It's not a question of pro/con where market making is concerned. As a retail trader you simply are not going to be able to do it. You are on the paying side of the spread, not the receiving side. To market-make you'd have to be in competition with the brokers and banks.
Martinghoul
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Why don't you read GammaJammer's excellent "Day in the Life of..." series?
alphadude
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hi Rhody Trader/Martinghoul,
what i am after is trading FX pairs; and taking advantage of the spread. am currently using Interactive Brokers; and the minimum pips is as low as 1/2 pip. the transaction cost is very low; and offers the advantage of trading the spread.
one of the strategies i was thinking of is placing a bid/ask trades to narrow the spread; hence providing liquidity. even 1 pip am still making a tiny profit after paying the commission.
on average the spread is 1 pip; and it fluctuates to 0.5 pip and 2 pips. the strategy is to place a pair of trades (buy and sell) to narrow down the 2 pip spread to 1 pip, or to 1.5 pip.
i am keen to know from experts in this area if there is an opportunity; and also to know the risks involved.
regards.
what i am after is trading FX pairs; and taking advantage of the spread. am currently using Interactive Brokers; and the minimum pips is as low as 1/2 pip. the transaction cost is very low; and offers the advantage of trading the spread.
one of the strategies i was thinking of is placing a bid/ask trades to narrow the spread; hence providing liquidity. even 1 pip am still making a tiny profit after paying the commission.
on average the spread is 1 pip; and it fluctuates to 0.5 pip and 2 pips. the strategy is to place a pair of trades (buy and sell) to narrow down the 2 pip spread to 1 pip, or to 1.5 pip.
i am keen to know from experts in this area if there is an opportunity; and also to know the risks involved.
regards.
JahDave
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The spread that any forex broker charges is less than what any other financial broker charges.......
Adamus
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If the term 'trading the spread' has a specific meaning, I'm not familiar with it, so do you mind if I ask how you profit from this strategy? Don't you need to put very large orders in (tens or hundreds of millions) to get any effect on the market like this?
alphadude
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hi Adamus, you profit from the spread itself; buy low sell high. and you are right; you have to trade large volume to get tiny profit. at the moment it is at the idea stage; so am not sure if it will be profitable; or the magnitude of the risks.
wackypete2
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Trading the spread is a very dangerous game. It's not as easy as you are thinking. If you place an inside order on each side of the market there's no guarantee both will get filled. If both orders fill you make 1 pip or so, but suppose your BUY order fills then the market drops 50 pips, leaving you at a net loss and an open sell order 50 pips away. If you are trying for a 1 pip gain the risk/reward ratio is extremely skewed against you.
It's easier to do with stocks than in forex but still not a recommended way to trade for the retail trader.
Peter
It's easier to do with stocks than in forex but still not a recommended way to trade for the retail trader.
Peter
alphadude
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Thanks Peter; the risks you indicated make sense; but have anyone in retail done this strategy successfully?
Adamus
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I figured that was what you meant but market making is the preserve of the big banks and dealers. We small folk buy at the ask and sell at the bid.
What I never understood is how the market makers keep themselves neutral - most of the trades they do are directional and I can see that with high volume they're going to build up some sort of position either one way or the other. Presumably they hedge it or offset it simultaneously as the day progresses, which means that they must trade with others as the non-market-maker - doesn't that just cut down their market-making profits?
What I never understood is how the market makers keep themselves neutral - most of the trades they do are directional and I can see that with high volume they're going to build up some sort of position either one way or the other. Presumably they hedge it or offset it simultaneously as the day progresses, which means that they must trade with others as the non-market-maker - doesn't that just cut down their market-making profits?
wackypete2
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Being a market maker doesn't guarantee being profitable. In volatile markets they are just as susceptible to losses as ayone else. The only difference is they are able to profit from the spread With low volatility they can practically print money all day long, especially in liquid markets.
Peter
Peter
wackypete2
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True enough for forex market makers which is what this thread is about. But they still do bear some risk, whether they win or lose. Most forex brokers do offset their positions but then again you are not really seeing true interbank rates.
Plenty of specialists on the NYSE, who are essentially market makers, have left the business due to excessive losses.
Peter
