Market making

[Pinkpanther7]

I'm not sure this is the correct place to ask but I'd like to know how market makers make money in big down days like we've had this week. They provide liquidity to the market and the next second they're already taking PnL losses. Are the expectations that days like this are not for making money and only to help their clients in the tough markets, in the hope that this keeps the relationship ongoing?

 

[Rhody Trader]

You will no doubt have noticed much wider bid/ask spreads than usual. That helps to at least buffer market makers against loss during volatility events.

Beyond that, keep in mind it is generally the idea for market makers to keep their positions at close to net flat as they can. They have risk systems in place which seek to minimize their exposure. Plus, they are in and out of the market very quickly so as to limit their time actually being exposed to price movements. If they do find themselves with an unwanted exposure, they simply adjust their bids and offers to try to work themselves back to where they want to be.

Does all this mean they don't suffer losses? No, but it helps to minimize any that might come along.